What Is a 401(k) Plan?
A 401(k) plan is a tax-advantaged, defined-contribution retirement account offered by many employers to their employees. It is named after a section of the U.S. Internal Revenue Code. Workers can make contributions to their 401(k) accounts through automatic payroll withholding, and their employers can match some or all of those contributions. The investment earnings in a traditional 401(k) plan are not taxed until the employee withdraws that money, typically after retirement. In a Roth 401(k) plan, withdrawals can be tax-free.
- A 401(k) plan is a company-sponsored retirement account that employees can contribute to. Employers may also make matching contributions.
- There are two basic types of 401(k)s—traditional and Roth—which differ primarily in how they’re taxed.
- In a traditional 401(k), employee contributions reduce their income taxes for the year they are made, but their withdrawals are taxed. With a Roth, employees make contributions with post-tax income but can make withdrawals tax-free.
- For 2020, under the CARES Act, withdrawal rules and amounts were relaxed for those affected by COVID-19, and RMDs were suspended.