What is a 401(k) Plan?

An employer-sponsored retirement plan that has become an expected benefit and is therefore important in attracting and retaining employees in the US. A 401(k) plan allows employees to defer taxes as they save for retirement by placing before-tax dollars directly into an investment account. Employers also contribute to the plan tax-free, for instance by matching contributions. Some plans enable employees to direct their own investments.

There are set distribution rules for 401(k) plans, these are not the same as those that apply to IRAs. If an individual decides to withdraw assets from their plan before the age of 60, they can expect to pay a 10% tax penalty. This is standard for all, with a few exceptions.