The 401k is a popular retirement savings product in the United States. Its name comes from subsection 401(k) of the Internal Revenue Code. With a 401(k) plan, a person sets aside a percentage of his income, which will not be taxed until it is withdrawn in the future. This helps workers by reducing their taxable income for each year they are contributing to the account. A contributor becomes eligible to withdraw funds upon reaching the age of 59 1/2 years.
The 401(k)s became widely adopted as retirement plans for American workers starting in the 1980s, and emerged as an alternative to the traditional retirement pension, which was paid entirely by employers. Now, employer contributions are usually a percentage of the funds contributed by the worker; each company sets its own flowland percentage.
To further clarify the mysteries of the 401(k), check out this infographic that explains how they work, and compares the traditional 401(k) to the Roth style savings instrument. This may help you to decide which type of retirement account you are interested in contributing to with your employer.
