401(k)
A tax-advantaged employer-sponsored retirement savings plan funded by payroll contributions.
What is 401(k)?
A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their pre-tax (traditional) or after-tax (Roth) salary into a tax-advantaged investment account. Traditional contributions reduce taxable income today; Roth contributions grow tax-free. For 2025, the IRS contribution limit is $23,500 ($31,000 for those 50 or older). Many employers match contributions — a common formula is 50–100% of employee contributions up to 3–6% of salary — effectively free money. Funds are invested in a menu of mutual funds chosen by the plan sponsor, typically including stock and bond index funds.
Example
An employee earning $80,000 contributes 6% ($4,800) to their 401(k). Their employer matches 50% up to 6% ($2,400 in free contributions). Combined $7,200/year grows tax-deferred. Over 30 years at 7% average return, this accumulates to approximately $729,000.
Source: IRS — 401(k) Plans