401(k) retirement funds are accounts for employees working in the private sector that allow them to store money either through a tax-deferred plan or through investments using pre-taxed income; 401(k) plans come in several varieties but have common restrictions such as one that employees cannot withdraw account funds before reaching the age of 59 and six months. In addition, 401(k) plans give employees personal discretion in deciding how much money to contribute and where to invest finances, notes WSJ.com. Companies offering a 401(k) plan put in a financial contribution along with a percentage of an employee's salary to help the account grow.
When investing in a 401(k), people usually choose from a portfolio of options, notes WSJ.com. Common investments include stocks, money market accounts and bonds. Employees may receive advice on where to allocate their finances, but they ultimately choose which stocks and markets to invest in. Many people choose to invest in target-date funds, which are a combination of stocks and bonds that have a more conservative yield as an employee approaches retirement.
401(k) plans come in two varieties, which are traditional and Roth. In a traditional account, employers report an employee's income at a lower level to the IRS after making adjustments for taxes. Taxes are then deferred until retirement, which lets account savings grow tax-free. In a Roth 401(k), employees still pay annual taxes and income taxes. Investments in the 401(k) plan continue growing, but on a pre-taxed investment; at retirement time, those with a Roth plan enjoy a tax-free income.