A 401(k) is a workplace retirement account that lets you invest part of each paycheck before tax — often with free money on top from your employer's match.
A 401(k) is a retirement savings plan offered by U.S. employers. You choose a percentage of each paycheck to contribute, the money is invested (usually in mutual funds or index funds), and it grows over decades. The name comes from a section of the U.S. tax code — the IRS sets the contribution limits each year.
With a traditional 401(k), contributions come out before income tax, lowering your taxable income today; you pay tax later when you withdraw in retirement. A Roth 401(k) flips this: you contribute after-tax dollars now and withdraw tax-free later — similar in spirit to a Roth IRA.
Many employers match part of what you contribute — for example, 50 cents per dollar up to 6% of your salary. That's an immediate, guaranteed return you can't get anywhere else. Not contributing enough to capture the full match is leaving free money on the table.
The real power of a 401(k) is time. Returns earn returns, year after year, so a dollar invested at 25 can grow to several times what the same dollar does at 45. Starting early — even with small amounts — usually beats starting later with larger ones.
Vesting matters: your own contributions are always yours, but employer-matched funds may require you to stay a few years to fully “vest.” Check your plan's schedule before you count on the match.
401(k) money is meant for retirement, so withdrawing early usually triggers taxes and a penalty. Investment choices are limited to your plan's menu, and fees vary. Still, the combination of tax breaks, employer match and compounding makes it one of the most powerful wealth-building tools available.
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Not advice: educational content only. For authoritative basics see the SEC at investor.gov.
Related: what is a Roth IRA, dollar-cost averaging, and how to start investing.
It is a workplace retirement account where you invest part of each paycheck. The money grows over decades and is often boosted by an employer match.
It is money your employer adds based on what you contribute, such as 50 cents per dollar up to 6% of pay. It is essentially free money and a guaranteed return on your contribution.
A traditional 401(k) uses pre-tax contributions and is taxed at withdrawal; a Roth 401(k) uses after-tax contributions and qualified withdrawals are tax-free.
Because of compounding — returns earn their own returns over time. Money invested in your twenties has decades to grow, so it can far outgrow larger contributions made later.