What is 401k?
A 401(k) is a retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck on a tax-deferred basis. 401(k) plans typically offer a range of investment options, such as mutual funds, exchange-traded funds (ETFs), and sometimes employer stock. Employees can choose how to allocate their contributions among these investment options based on their risk tolerance and retirement goals.
Key Features of 401k:
- Employee Contributions: Employees contribute a portion of their pre-tax income to their 401(k) account, reducing their taxable income for the year.
- Employer Contributions: Many employers offer matching contributions to their employees’ 401(k) accounts, typically based on a percentage of the employee’s contributions.
- Tax-Deferred Growth: Contributions to a 401(k) plan grow tax-deferred, meaning that investment earnings are not taxed until withdrawn. This allows investments to compound over time, potentially leading to significant growth in the account balance.
Difference between 403b vs. 401k
In navigating the realm of retirement planning, understanding the distinctions between various savings options is crucial. Two commonly discussed retirement plans are the 403(b) and the 401(k). These plans, while similar in some aspects, differ significantly in terms of eligibility, contribution limits, investment options, and administration.