Definition
401(k) plans are the most common employer-sponsored retirement vehicle. Pre-tax contributions reduce current taxable income; Roth 401(k) contributions are after-tax. Many employers match contributions (free money). The 2024 contribution limit is $23,000 ($30,500 for 50+). Funds grow tax-deferred (pre-tax) or tax-free (Roth). Early withdrawal before 59½ incurs 10% penalty plus taxes.
lightbulb Example
An employee earning $100K contributes 10% ($10K) pre-tax and receives a 4% employer match ($4K). Total annual savings: $14K. The pre-tax contribution saves $2,400 in taxes immediately (24% bracket). Over 30 years at 8%, the $14K/year grows to $1.63M.
verified_user Key Points
- Pre-tax or Roth contribution options
- Employer match is free money—always maximize
- 2024 limits: $23,000 ($30,500 if 50+)
- Early withdrawal penalty: 10% plus taxes