Understanding 401(k) Basics and Contributions

A 401(k) is a company-sponsored retirement plan allowing employees to save and invest a piece of their paycheck before taxes are taken out. It's named after a section of the U.S. tax code.

Contributions to a traditional 401(k) are made with pre-tax dollars, reducing your taxable income. The funds then grow tax-deferred until you withdraw them in retirement, typically after age 59½.

Some employers offer a Roth 401(k) alongside the traditional 401(k). Contributions are made with after-tax dollars, but withdrawals in retirement are tax-free, assuming certain conditions are met.

Many employers offer a match to your 401(k) contribution, essentially free money. However, there's often a 'vesting period' before you fully own the matched funds.

For 2023, the contribution limit for a 401(k) is $22,500. If you're 50 or older, you can make catch-up contributions up to an additional $7,500, totaling $30,000.

Some 401(k) plans permit loans or hardship withdrawals, but they can severely impact your retirement savings and are subject to penalties if not repaid in time or qualifying conditions are not met.

401(k) plans offer a range of investment options. Fees and fund performance can greatly impact your retirement savings over time, so it's crucial to make informed choices.