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401(k) Plan

[FOHR-oh-wuhn-KAY plan]

What is the definition of 401(k) Plan?

A retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck before taxes are taken out. Contributions are made to an individual account, and taxes are not paid on the money until it is withdrawn from the account.

Using 401(k) Plan in an Example

In a typical 401(k) plan, an employee can choose to contribute a percentage of their salary into the plan, which is then invested in selected mutual funds, stocks, or bonds. The employer may also match a portion of the employee's contribution, enhancing the growth of the employee's retirement savings.

Using 401(k) Plan in a sentence

John decided to maximize his retirement savings by contributing the maximum allowable amount to his company's 401(k) plan, taking full advantage of his employer's matching contributions.

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