401(k)

A 401(k) is a retirement savings plan sponsored by an employer. It allows employees to save and invest a portion of their paycheck before taxes are taken out. These contributions, and any earnings, typically grow tax-deferred until withdrawal during retirement, potentially lowering one's current tax burden and allowing for compounding investment growth. Employers may also offer matching contributions, further boosting the retirement savings.

401(k) meaning with examples

• Sarah diligently contributes to her 401(k) each month, taking advantage of her company's generous matching program. This allows her to invest a portion of her salary tax-free and gives her more money for retirement as she contributes a percentage of her pay. She reviews her investment options annually to ensure her portfolio aligns with her risk tolerance and long-term goals. This is part of her long-term financial planning.
• John maximized his 401(k) contributions to reach the annual contribution limit, hoping to take advantage of the tax benefits. He chose a diversified portfolio of mutual funds and ETF's based on guidance from his financial advisor. John’s foresight enabled him to reduce his taxable income and build a robust retirement nest egg, providing him with financial security in his later years and allowing him to have time to see the world.
• During her annual performance review, Maria learned about her company’s new 401(k) plan and its potential benefits. She was excited that she could save her retirement money pre-tax and take advantage of the company's contributions. She reviewed the investment options and chose a blend of stocks and bonds to ensure her portfolio would match her risk tolerance. She decided to have the money deducted before being deposited in her bank account.
• Despite the initial confusion, David quickly learned how to manage his 401(k) contributions after being hired at a new company. He explored the plan's online resources and contacted the plan administrator for clarification. He used automatic paycheck deductions to allocate a portion of his salary, as the plan made this easy. David was committed to having his money ready for his retirement in a few decades.
• Emily, a freelance consultant, opted out of her company’s 401(k) plan because of high fees but later decided to contribute to a different plan. She found a low-cost alternative that still offered tax advantages. She learned the importance of comparing fees and investment options to maximize returns. She also made sure that the funds were properly diversified as to protect her assets.