A 401(k) is a retirement savings plan sponsored by an employer.
A 401(k) lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.
There is a 401(k) account type, the Roth 401(k), that allows you to deposit money post-tax from your paycheck. This means that all of the money in those accounts are cash-positive, and you do not need to pay taxes on those deposits. This might seem like a very great thing, but remember, it could also mean a much smaller paycheck in the end. However, if you think you will be in a higher tax-bracket after retirement, this may be a better option.
How employers handle 401(k) contributions (and why it’s important)
Typically employers will offer some sort of match to encourage employees to save. This means that you can, in essence, double your money with the contribution rates offered.
The employee typically has the right to select the amount and distribution of their investment options. The employer (or fund manager), however, has the right to select the actual funds that an employee can invest.
Other employer-sponsored retirement account types
Some industries use 403(b)s and not 401(k)s. They are very similar in structure.
The main difference is that 403(b) plans are only available to employees of tax-exempt, nonprofit institutions like schools, hospitals, and charities.