Simple definition
A 401(k) is a retirement account offered by an employer. You contribute straight from your paycheck, usually before tax, which lowers your taxable income now. Many employers match part of what you put in (money added to your account for free), and the whole balance grows tax-deferred until you withdraw it in retirement.
Why it matters
The employer match is one of the highest-return moves in personal finance: put in a dollar, and your employer may add fifty cents or more instantly. Skipping the match leaves that money on the table. The pre-tax contributions also trim your tax bill in the year you make them.
Real-life example
Your job matches 50% of what you contribute, up to 6% of your pay. If you earn $50,000 and contribute 6% ($3,000), your employer adds $1,500: an immediate 50% return before the market does anything. Not capturing the full match means turning down a raise.
Common mistakes
- Contributing less than the amount needed to get the full employer match.
- Leaving contributions in cash instead of choosing investments inside the plan.
- Cashing out the 401(k) when changing jobs and paying taxes and a penalty.
- Ignoring high fees on some plan investment options over the years.
Pro tips
- Contribute at least enough to capture the full employer match. That's the first priority.
- When you leave a job, roll the balance into an IRA or your new plan instead of cashing it out.
- Increase your contribution by 1% each year or whenever you get a raise. You'll barely feel it.
- Favor low-cost, diversified funds inside the plan to keep fees from eating your growth.
Related Money Dictionary terms
- Roth IRAA retirement account funded with after-tax money that grows and comes out tax-free.
- Employer MatchMoney your company adds to your retirement account based on how much you contribute, effectively free money toward your savings.
- VestingThe process of earning full ownership of employer-contributed retirement money, often requiring you to stay for a set number of years.
- Contribution LimitThe maximum amount the government lets you put into a retirement account in a single year.
- RolloverMoving money from one retirement account to another, such as a 401(k) into an IRA, without triggering taxes.
- Index FundA fund that owns a broad slice of the market at low cost: the backbone of most investing.
Frequently asked questions
How much should I contribute to my 401(k)?
At a minimum, enough to get your full employer match. From there, many people work toward saving 10–15% of income for retirement, raising it over time as their budget allows.
What happens to my 401(k) when I change jobs?
You can leave it, roll it into your new employer's plan, or roll it into an IRA. Rolling it over keeps the money growing tax-deferred and avoids the taxes and penalty of cashing out.
What is a Roth 401(k)?
It's a 401(k) funded with after-tax money, like a Roth IRA. You pay tax now and withdraw tax-free later. Some employers offer it alongside the traditional pre-tax 401(k).
Knowing what 401(k) means is knowledge: the first half. A brick gets placed when you act on it: log in to your 401(k) and raise your contribution to at least the full employer match. It's free money.
Also builds: Workplace Benefits
Sources & references
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Plain-English education, not personalized legal, tax, or investment advice.