A 401(k) plan is a type of retirement savings plan sponsored by employers for their employees. The plan allows employees to make pre-tax contributions from their paychecks, which are then invested in a range of options offered by the plan.
The maximum contribution limit for a 401(k) plan in 2022 is $20,500 for employees under age 50 and $27,000 for employees age 50 and older.
Many employers offer a matching contribution, which means they will contribute a certain percentage of an employee's contribution to the plan.
401(k) plans offer a variety of investment options, including mutual funds, index funds, and target-date funds. Participants can choose their own investment mix based on their risk tolerance and retirement goals.
401(k) plans offer portability, meaning that employees can take their savings with them if they change jobs. Some 401(k) plans allow for loans, which can be a useful source of emergency funds.
With a traditional 401(k) plan, contributions are tax-deductible in the year they are made, but withdrawals in retirement are taxed as ordinary income.
With a Roth 401(k) plan, contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.
The benefits of a 401(k) plan include tax-deferred growth, employer matching contributions, and the ability to save for retirement in a disciplined and structured manner.