A 401(k) plan is a retirement savings and investing plan offered by employers. It allows employees to save money tax-free and choose investments from a list of offerings. Employees contribute to their individual accounts through automatic deductions from their paychecks. Additionally, many employers offer to match a portion of the employee’s savings, resulting in free money for the employee. The account limits for 2023 are $22,500 ($30,000 for those aged 50 or older). It also allows employees to specify their desired percentage of stocks versus bonds.


401(k)s offer tax-free savings and growth and are a great way to save for retirement. However, employers may not offer access to 401(k)s, and the investment selections can be limited. Individual Retirement Accounts (IRAs) are another option for saving for retirement and offer benefits such as a broader selection of investments and generally lower fees. 401(k)s can be traditional or Roth, and contributions to traditional 401(k)s are taken out of your paycheck before taxes are paid so that your money grows tax-free. Contributions to a Roth 401(k) are taken out of your paycheck after taxes are paid. Investment growth in both traditional and Roth 401(k)s is tax-free.


The traditional 401(k) plan offers contributors tax deductions on their contributions and investment growth, however, when distributions are made in retirement, income taxes are due. The Roth 401(k) plan, if offered by an employer, allows contributors to make contributions with post-tax income, and distributions from the account are tax-free in retirement. Withdrawals from either type of 401(k) plan are not permitted until age 59 ½, with exceptions for certain hardship withdrawals. Yearly contributions have also increased due to rising inflation, with individuals being able to contribute up to $22,500 in 2023 and those over 50 being able to contribute up to $30,000.


President Biden has signed a spending bill that will require employers to automatically enroll employees in 401(k) and 403(b) plans from 2025. The contributions will start at 3% and increase annually until the contributions reach 10-15%. Furthermore, the legislation states that all current 401(k) and 403(b) plans will be grandfathered. Employees will be able to take their 401(k) with them if they leave their job and it is recommended that they roll it over to an IRA. Dayana Yochim, a former NerdWallet authority on retirement and investing, has provided further information and advice on the topic.


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