401(k)
A retirement account offered through an employer that changes when tax is paid on the money and lets it grow untaxed in between.
A 401(k) is a retirement account offered through an employer. It moves money out of your paycheck before you can spend it, changes when income tax is paid on that money, and lets the balance grow untaxed in between.
In a traditional 401(k), contributions come out of pay before income tax is calculated — take-home drops by less than the contribution, and the tax bill is deferred until withdrawal, when it is taxed as ordinary income. Many plans also offer a Roth 401(k) option, which flips the timing: taxed now, untaxed later. Inside the account, dividends and gains are not taxed year by year.
Three facts to hold onto. There is an annual IRS contribution limit, higher for people 50 and older. Withdrawals before age 59½ generally incur income tax plus a 10% penalty, with specific exceptions. And plans differ — your employer chooses the investment menu, the fees, the match formula, and whether a Roth option exists.
Plumb is financial education, not financial, investment, tax, or legal advice.