What is 401(k)?

A 401(k) plan is a retirement savings account sponsored by your employer, and it allows you to save a portion of your pre-tax income for your future. 401(k) comes from the Internal Revenue Code section regulating these plans.

One of the main benefits of a 401(k) plan is that it lowers your taxable income. For example, earning $50,000 a year and contributing 10% to your 401(k), you'll only pay taxes on $45,000. This means you'll save money on taxes now and let your savings grow tax-deferred until you withdraw them in retirement.

Another benefit of a 401(k) plan is that many employers offer matching contributions. If your employer matches 50% of your contributions up to 6% of your salary, they will add 3% to your account. That's free money for retirement!

So, should you enroll in a 401(k)? If your employer offers a matching contribution, you should contribute enough to get the full match. That's a guaranteed return on your investment. Beyond that, you should weigh the pros and cons of saving more in your 401(k) versus other options, such as an IRA.

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