What is a 401(k) account? What are the benefits of it? These questions often arise when finding out that part of an individual’s benefit package includes a 401(k)-retirement plan.

A for Account

A primary objective during one’s working years should be to accumulate sufficient savings to ensure a secure and comfortable retirement. A 401(k) is a type of retirement savings plan designed to help employees save and invest for retirement in a tax-advantaged way.

An individual who is enrolled in a 401(k) account elects to contribute a certain percentage of their salary, which is then directly deducted from their paycheck and is deposited into the 401(k) account. These funds will benefit from tax-advantaged growth until withdrawn in retirement.

B for Benefit

One main benefits as compared to other qualified retirement accounts (i.e. IRA)are the higher contribution limits and the opportunity to receive contributions from the employer. Also, by linking these contributions to payroll participants develop good spending habits. More information regarding contribution limits can be found here:  *link catch up contribution paper change*

C for Contributions

An employee can either use pre-tax money (regular) or after-tax money (Roth) to make contributions to the accounts. The difference between these two is explored in this paper: *insert link to Roth paper*

    D for Distributions

To encourage saving for retirement, there are strict rules regarding distributions from the account. Typically, is that distributions cannot be taken until age 59 ½ (or after 55 if retired) without being subject to a penalty.

Additionally, an individual must withdraw a minimum amount annually once they reach a specific age. As of 2025, that age is 73. The IRS wants to ensure that tax-deferred savings eventually get taxed. Roth contributions are not subject to required minimum distributions.

E for Employer Contributions

Employers are able to contribute to the 401(k) as well. This is often done through a matching formula based on participant contributions. For example, if an employee puts $2,000 into their 401(k) and the employee makes $40,000, the employer matches 4%, the total contribution would be $3,600 ($2000 of the employee’s contributions plus $1600 from the employer).

Another option would be that the employer contributes a percentage of the investor’s salary to the plan, regardless of if the investor contributes to the 401(k) or not. This is called a non-elective contribution. For example, if the employer contributes 3% of the employee’s compensation and the employee makes $40,000, the employer would contribute $1200 to the employee’s 401(k) regardless if the employee contributes or not.

V for Vesting

Employer contributions and subsequent earnings can be subject to vesting requirements. Vesting refers to the schedule by which an employee gains ownership of employer contributions to their retirement plan over time, typically according to a set schedule. Any contribution that is not fully vested is lost when the employee leave the plan.

Next Steps

When joining a plan, we typically recommend the following next steps:

1. Determine what makes more sense for your tax situation: regular or Roth contributions.
2. Enroll and start saving as soon as you are eligible to participate.
3. Make sure you are taking full advantage of any matching benefit available to you.