What is a 401k?


Quick Answer

Investopedia defines a 401(k) as a savings plan offered by employers that allows an employee to make contributions from his salary either on a pre-tax basis or a post-tax basis, sometimes both. The employer also makes a contribution to an employee's 401(k) plan that matches the original contribution or is a non-elective contribution. Some plans also include a profit-sharing feature.

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Full Answer

According to Investopedia, the earnings from a 401(k) plan are accrued on a tax-deferred basis. There are limits put in place by the IRS that limit how much an employee can contribute to his plan in addition to rules regarding when and how an employee is allowed to make a withdrawal from his plan. Plans are managed and directed by financial experts whom the employer selects at its own discretion.

If an employee makes an unauthorized withdrawal from his 401(k) plan while he is under a predetermined retirement age, penalties may be incurred, notes Investopedia. Several savings plans allow an individual to dictate his own investments. Such plans can offer a selection of investment products for the individual to choose.

Lee Ann Obringer for HowStuffWorks notes some of the advantages of a 401(k) plan include free contributions from an employer, growing earnings and savings that the employee does not have to remember to make deposits into and a lower taxable income.

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