What is a 401(k) Plan?

A 401(k) account is most often used for private sector employees. They are similar to IRA accounts. 

• The contributions are tax-deductible

• The contributions come straight out of your paycheck

• Sometimes your employer will match some of your contributions

• Sometimes your employer will offer profit-sharing contributions

• Some plans require a vesting period, meaning if you leave your job within a certain period of time, you may lose part of your matched or profit-shared contributions; after that period of time, you are vested and the entire contribution is yours

• Leaving a job before that vesting period is complete can cost you a lot, so watch that schedule carefully

The money you save in a 401(k) grows tax-deferred which means you will not pay taxes on the growth of your money until you retire and even then, for most, the tax rate will be lower after retirement.