What Is a 401k Plan?

A 401k plan is a type of retirement plan that is offered by employers for their employees. With this type of retirement plan, you can set aside a certain amount of your paycheck toward your retirement every year. Here are a few things to consider about the 401k plan and how it works.

401k Plan

One of the big advantages of investing in a 401k plan is that you can set aside money on a pretax basis. This allows you to save more money toward your retirement. Every year, you will be subject to a maximum amount of money that you can contribute. As of 2010, you can set aside as much as $16,500 per year, or $22,000 if you are over the age of 50.


Another advantage of the 401k plan is that your employer can contribute to your plan as well. These are known as matching contributions. For example, many employers will match 50 percent of your contribution up to a certain amount. This is essentially amounts to free money that your employer is adding to your retirement account. The employer has an incentive to do this because it allows them to reduce their taxable income for the year.