401(k)
An employer-sponsored retirement account that lets you invest part of your paycheck before taxes, often with a matching contribution.
What 401(k) means
A 401(k) is a retirement savings plan offered through your employer. You choose a percentage of each paycheck to divert into the account, and that money is invested — usually in a menu of mutual funds the plan administrator selects.
With a traditional 401(k), contributions come out before income tax is applied, which lowers your taxable income today; you pay ordinary income tax when you withdraw in retirement. A Roth 401(k), where offered, flips that: you contribute after-tax dollars and qualified withdrawals are tax-free.
Many employers match some portion of what you put in — a dollar-for-dollar match up to 3% of salary is common. That match is part of your compensation, so contributing at least enough to earn all of it is usually the highest-return move available to a new saver.
The IRS caps annual contributions and imposes a 10% penalty on most withdrawals before age 59½, on top of ordinary income tax. Employer contributions may also be subject to a vesting schedule.
Example
In practice: If you earn $60,000 and contribute 6% ($3,600) to a plan with a 3% dollar-for-dollar match, your employer adds $1,800 — an immediate 50% return on your own contribution.
Related terms
Roth IRA
A retirement account funded with after-tax dollars where qualified withdrawals, including all growth, come out tax-free.
Traditional IRA
A retirement account where contributions may be tax-deductible now and withdrawals are taxed as ordinary income later.
Vesting
The schedule on which employer contributions or equity grants actually become yours to keep if you leave.
Index Fund
A fund that mechanically tracks a market index rather than picking stocks, giving broad exposure at very low cost.
Compound Interest
Interest earned on both your original money and the interest already added to it, which makes balances grow faster over time.
Run the numbers
Retirement Calculator (401k & Roth IRA)
Project your retirement balance with employer match and compound growth, and compare Traditional vs. Roth after-tax outcomes.
FIRE Calculator
Find your FIRE number, how many years until financial independence, and the age you could retire early — based on your savings rate and returns.
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