{"id":6511,"date":"2025-06-24T04:05:38","date_gmt":"2025-06-24T09:05:38","guid":{"rendered":"https:\/\/resource-center.hrblock.com\/?p=6511"},"modified":"2025-06-24T15:05:47","modified_gmt":"2025-06-24T20:05:47","slug":"what-is-a-401k","status":"publish","type":"post","link":"https:\/\/hrbcomlnp.hrblock.com\/tax-center\/income\/retirement-income\/what-is-a-401k\/","title":{"rendered":"What is a 401(k)?"},"content":{"rendered":"\n

Start a new job and you may hear a lot of talk about a 401(k) as you’re completing the multitude of first-day paperwork. What is a 401(k), you ask? At its core, a 401(k) is a technical name for a retirement investment plan tied to your workplace. To get technical, it\u2019s a type of plan called a \u201cdefined contribution plan.\u201d<\/p>\n\n\n

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At a high-level, here’s how it works: You put money into an account that is then invested in stocks, bonds, money market accounts and more. Your employer will work with a company \u2014 like Fidelity Investments or Vanguard \u2014 to select the mix of investments. This amount of money grows over time, and typically provides a better return than a traditional savings account. Once you retire, you can begin to withdraw funds from the 401(k) to support yourself.<\/p>\n\n\n\n

Some common questions about 401(k) plans<\/h2>\n\n\n\n

Can you open your own 401(k) plan?<\/h3>\n\n\n\n

As an individual you can\u2019t open up a plan.  401(k) plans are offered \u2013 or \u201csponsored\u201d \u2013 by employers, unless you\u2019re a small business owner, and in which that case you can open a solo 401(k).  Employers will often match a certain percentage of the amount you put into the plan (also called your \u201celective deferral\u201d). Let\u2019s say you send 4% of your salary to your 401(k). It\u2019s possible that your employer may contribute additional money to this retirement account. It could be 1%, 2%, 3% or more. However, employers aren\u2019t required to make this contribution, so the amount will vary widely. People often refer to this as \u201cfree money!\u201d<\/p>\n\n\n\n

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Is 401(k) pre tax?<\/h3>\n\n\n\n

Yes, but only in a Traditional 401(k). The money invested in a 401(k) is deducted from your paycheck before<\/strong> taxes. However, it will be taxed when you withdraw money during retirement. The idea is that your tax rate in retirement will be lower than your current tax rate.<\/p>\n\n\n\n

What is a Roth 401(k)?<\/h3>\n\n\n\n

Your employer might offer a Roth 401(k), which is similar. The key difference is that with a Roth 401(k) plan income tax is paid at the time of investment, not when funds are withdrawn during retirement. in other words, a Roth 401(k) is not pre-tax. The taxation of any distribution will depend on whether or not it is \u201cqualified.\u201d<\/p>\n\n\n\n

What if my employer doesn’t have any 401(k)?<\/h3>\n\n\n\n

If you\u2019re employer doesn\u2019t offer a 401(k) plan, there are many other defined contribution plans that are similar to them.<\/p>\n\n\n\n