401(k)
A US employer-sponsored retirement account that lets you invest pre-tax dollars.
A 401(k) is a US tax-advantaged retirement account offered through an employer. The name comes from a section of the Internal Revenue Code — Section 401(k), added in 1978 — that almost passed unnoticed and accidentally became the foundation of US retirement saving.
You can contribute up to a yearly limit ($23,500 in 2025 for under-50s, with a catch-up amount on top after 50). Contributions reduce your taxable income for that year. The money grows tax-deferred — you pay income tax when you withdraw it in retirement, ideally at a lower rate.
Roth 401(k)s flip the timing: you contribute post-tax money, and qualified withdrawals are tax-free.
The catch is that the account is just a wrapper. What's inside it — the funds, their fees, the diversification — is what determines whether it works.
Example
Earn $80,000 and contribute $10,000 to your 401(k) — you're taxed on $70,000 this year, and the $10,000 grows tax-deferred until retirement.
Why this matters
It's the most common retirement vehicle in the US, and the only one many people use. Used well it's an extraordinary tool. Used badly — wrong fund, high fees, no employer match — it's a slow leak.
The catch
Your 401(k) is only as good as the funds inside it. Many plans default new employees into a "target-date" fund with a high expense ratio. A 0.7% expense ratio looks tiny but compounds to roughly 17% of your final balance over 40 years.