What is a 401(k) plan and how does it work?

What is a 401(k) plan and how does it work?

A 401(k) is a retirement savings and investing plan that employers offer.

The plan gives employees a tax break on money they contribute.

Contributions are automatically withdrawn from employee paychecks and invested in funds of the employee’s choosing.

401(k)s have an annual contribution limit of $20,500 in 2022, $27,000 for those age 50 or older.

Employees contribute money to an individual account by signing up for automatic deductions from their paycheck.

Employers who match their employee contributions use various formulas to calculate that match.

Financial advisors often recommend that employees contribute enough money to their 401(k) plans to get the full employer match.

Depending on the type of plan, tax break comes either when you contribute money or when you withdraw it for retirement.