401(k)
A US employer-sponsored retirement savings plan allowing pre-tax contributions with tax-deferred growth.
Also: 401(k)
Definition
A 401(k) is a US employer-sponsored retirement savings plan that allows employees to contribute a portion of their pre-tax salary, reducing current taxable income. Contributions and earnings grow tax-deferred until withdrawal in retirement (typically after age 59.5), when they are taxed as ordinary income. Many employers match employee contributions up to a percentage (e.g., 50% up to 6% of salary). The 2024 annual contribution limit is $23,000 (plus $7,500 catch-up for those 50+). Roth 401(k) contributions are post-tax but grow tax-free.
Example
“An employee earning $80,000 contributes 6% ($4,800) to their 401(k); their employer matches 3% ($2,400), resulting in $7,200 in total retirement savings that year, all tax-deferred.”
Usage Examples
- 1
“The team applied 401(k) best practices to improve their personal finance outcomes significantly.”
- 2
“Understanding 401(k) is essential for anyone building a career in Finance.”
When & How to Use
Use '401(k)' when working in Personal Finance contexts where a 401(k) is a us employer-sponsored retirement savings plan that allows employees to contribute a portion of their pre-tax salary, reducing current taxable income.
- ▸Applying 401(k) principles during a personal finance project or initiative
- ▸Explaining 401(k) to a junior team member or stakeholder unfamiliar with Finance
- ▸Evaluating options or proposals using 401(k) as a decision-making criterion
Etymology & Origin
The term '401(k)' derives from professional usage and entered Finance professional usage as the field formalised in the 20th century.
History & Evolution
The concept of 401(k) has evolved alongside Finance. Early practitioners relied on informal methods; structured approaches emerged with the professionalisation of personal finance in the mid-20th century. Today, 401(k) is a standard part of Finance practice globally.
Synonyms
- retirement savings plan
- employer-sponsored retirement
- DC plan
Antonyms / Opposites
- Roth IRA
- taxable account
Images
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Related Terms
- ira
- retirement
- tax-deferred
- employer-match