401(k)

A 401(k) is the most common workplace retirement plan in the United States. You decide a percentage of each paycheck to defer into the account, the money is invested in funds the plan offers, and it grows over decades. Many employers add a match on part of what you contribute, which is the closest thing to free money most workers get.

There are two flavors. A traditional 401(k) takes contributions before income tax, so it lowers your taxable income now and is taxed when you withdraw in retirement. A Roth 401(k) takes after-tax money now and lets qualified withdrawals come out tax-free later. Either way, contributions are capped by an annual IRS limit, and employer money may be subject to a vesting schedule. Our retirement on-track playbook and Roth versus traditional playbook show how to use a 401(k) in a real plan.