What is a 401(k) Plan? Definition and Basics

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A 401(k) is a retirement savings plan offered by employers that lets you invest a portion of your paycheck before taxes.

Your money grows tax-deferred until you withdraw it in retirement. It’s one of the most popular ways to build retirement savings—especially with employer matching.

How a 401(k) Plan Works

  1. You contribute a percentage of your salary automatically from each paycheck.
  2. Your employer may match part of your contribution.
  3. Funds are invested in options like mutual funds, stocks, or bonds.
  4. Taxes are deferred until withdrawal traditional 401(k) or paid upfront Roth 401(k).

401(k) vs. Pension

  • Pension: Employer guarantees a set income in retirement.
  • 401(k): You fund and manage your own account, with potential employer match.

Employer Matching

Many employers match a portion of your contribution—commonly 50% up to 6% of your salary. This is essentially free money and one of the biggest advantages of 401(k)s.

Be aware of vesting schedules:

  • Graded vesting: You gain ownership over time.
  • Cliff vesting: You get 100% of the match after a certain period.

Types of 401(k) Plans

Here are the different type of 401(k) plan options that you can choose from:

Traditional 401(k)

  • Funded with pre-tax dollars.
  • Taxes paid when you withdraw in retirement.
  • Lowers your taxable income now.

Roth 401(k)

  • Funded with after-tax dollars.
  • Withdrawals are tax-free in retirement.
  • Ideal if you expect to be in a higher tax bracket later.

Tip: Younger workers or those expecting rising income often benefit more from Roth 401(k)s.Contribution Limits (2025)

Contribution Limits (2025)

  • $23,500 for employee contributions.
  • Catch-up contribution: +$7,500 if age 50+.
  • Employer + employee total limit: $69,000.

Withdrawals & RMDs

  • Withdrawals allowed at 59½ (earlier may incur taxes + 10% penalty).
  • Required Minimum Distributions (RMDs) start at age 72 unless you’re still working.
  • Roth 401(k) RMDs can be avoided by rolling over to a Roth IRA.

What happens if I change jobs?

  • Roll over your 401(k) into a new employer’s plan or an IRA.
  • Avoid cashing out to sidestep taxes and penalties.

What are my investment options?

You’ll choose from your plan’s options, which may include:

  • Mutual funds
  • Target-date funds
  • Company stock
  • Bonds or GICs

How to Maximize Your 401(k)

Here are the most effective ways that you can maximize your savings inside of your 401(k):

  • Contribute enough to get your full employer match.
  • Aim for 15% of your income if possible.
  • Increase contributions with raises or bonuses.
  • Review investment fees and reallocate periodically.
  • Don’t pause contributions due to market dips.

Traditional vs. Roth IRA: Which Is Better?

  • Choose Traditional IRA if you want a tax break now and expect a lower tax rate later.
  • Choose Roth IRA if you expect to be in a higher tax bracket in retirement or want tax-free income later.

Final Thoughts

A 401(k) is one of the best tools to grow your retirement savings—especially with employer contributions and tax advantages.

Take full advantage by contributing consistently, understanding your investment choices, and staying the course.

Bonus: Want to Own Gold in Your 401(k)?

You can invest in gold and silver through a self-directed Gold IRA. This allows you to hold physical precious metals as part of your retirement portfolio—offering a hedge against market volatility.