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 MoneyPedia 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 401k 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).
Learn the skill behind it
- Retirement AccountsBuild your future. Get the tax break now.
- Workplace BenefitsThe paycheck beyond the paycheck.
Sources & references
More in Retirement
Plain-English education — not personalized legal, tax, or investment advice.