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A 401(k) is an employer-sponsored retirement savings plan in the United States that allows employees to contribute a portion of their pre-tax income toward investments for retirement. Employers may match contributions up to a specified percentage, and the funds grow tax-deferred until withdrawal. The plan is named after Section 401(k) of the Internal Revenue Code, which was added in 1978 and established the legal framework for these accounts.
Tax Treatment and Contribution Limits Contributions to traditional 401(k) plans are made with pre-tax dollars, reducing taxable income in the year they are made. As of 2024, the annual contribution limit for individuals under 50 is $23,000, with an additional $7,500 catch-up contribution allowed for those aged 50 and older, according to the IRS. Earnings grow tax-deferred, and taxes are paid upon withdrawal during retirement.
Employer Matching and Vesting Many employers offer matching contributions, commonly up to 3% to 6% of an employee’s salary. These matches often follow a vesting schedule, meaning employees gain full ownership over time. Fully vested balances belong to the employee even if they leave the company.
Roth 401(k) options are also available, allowing after-tax contributions with tax-free withdrawals in retirement, subject to eligibility rules.