what is a 401k

A 401(k) plan is an employer-sponsored, defined-contribution, personal pension account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. It is a retirement savings plan that allows employees to invest a portion of their paycheck before taxes are taken out. There are two basic types of 401(k) plans: traditional and Roth. In a traditional 401(k), employee contributions are made with pre-tax dollars, reducing taxable income, while withdrawals are taxed. In a Roth 401(k), contributions are made with after-tax income, and withdrawals are tax-free. Employers may also match part or all of the employee's contribution, providing a tax-advantaged way to save for retirement