The 401(k) — Employer-Sponsored Retirement
A 401(k) is an employer-sponsored retirement savings plan allowing employees to contribute pre-tax dollars that grow tax-deferred until withdrawal in retirement. 'Pre-tax' means contributions reduce your taxable income in the year you contribute — if you earn $80,000 and contribute $10,000 to a 401(k), you pay income tax on only $70,000 that year. The investments grow tax-deferred: dividends, interest, and capital gains are not taxed annually — they compound unimpeded. At withdrawal in retirement (after age 59½), distributions are taxed as ordinary income. The 2024 contribution limit is $23,000 (with an additional $7,500 catch-up contribution for those 50 and older). The single most impactful feature of most 401(k) plans is the employer match — the employer contributes additional money based on the employee's contribution, typically matching 50%–100% of contributions up to 3–6% of salary. A 100% match on the first 3% means: if you earn $80,000 and contribute 3% ($2,400), your employer adds $2,400 for free. The effective instant return on that first 3% is 100% — no investment in any asset class can reliably match this. The absolute first rule of personal finance: always contribute enough to capture the full employer match — failing to do so is leaving guaranteed free money on the table. Vesting schedules apply to employer contributions — typically 3–6 years before employer contributions are fully owned.