401(k)
Explain it like I’m new
A retirement savings account offered by your employer. Money goes in from your paycheck before taxes, grows over time, and your employer may add a matching contribution.
Technical version
A qualified, employer-sponsored defined-contribution plan under IRC §401(k) allowing elective salary deferrals with annual limits set by the IRS.
Why people get confused
- ✕‘I’ll start later.’ The years you skip cost the most, because of compounding.
- ✕‘The match is automatic.’ You usually have to contribute to receive it.
- ✕‘It’s locked forever.’ Loans, rollovers, and hardship rules exist — with tradeoffs.
What decision this affects
An employer match is often the highest-return move in personal finance — declining it is leaving compensation on the table.
- →Contribute at least enough to capture the full employer match.
- →Choose traditional (pre-tax) vs. Roth based on today’s vs. expected future tax rate.
- →Review fund fees — anything above ~0.5% deserves a second look.
Related next concepts
A retirement account you open yourself. You pay taxes now, and qualified withdrawals later are tax-free.
The schedule on which you actually earn equity or retirement contributions you’ve been promised.
A fund that buys a little of everything in a market index (like the S&P 500) instead of trying to pick winners. Low cost, broadly diversified.
Cash set aside for surprises — job loss, medical bills, car repairs. Usually 3–6 months of essential expenses.
Trusted sources
- Should I do Roth or traditional 401(k)?
- What happens to my 401(k) when I change jobs?
- How much should I contribute?
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