What is a 401(k)?

A 401(k) is a retirement savings plan that is sponsored by an employer, allowing employees to save for their future by setting aside a portion of their pre-tax income. This plan often includes the opportunity for the employer to match contributions, which can significantly enhance the retirement savings of the employee. The funds in a 401(k) grow tax-deferred until withdrawal, typically during retirement, when they may be taxed at a lower income rate.

This structure encourages employees to save for retirement, helps them to build a nest egg for their later years, and takes advantage of tax benefits that can promote financial health in the long run. Understanding the role of a 401(k) is crucial for effective retirement planning, as it can lead to significant financial security in the future.