Named after the section of\nthe US Internal Revenue Code under which this retirement planning account is\ndefined, 401(k) accounts are company-sponsored, tax-advantaged, and defined\ncontribution plans where you can contribute pre-tax dollars. As an employee,\none may contribute up to $19,500 per year for 2021 if they opt in for this\nplan. This cap on employee contribution is changed periodically by the IRS. <\/p>\n\n\n\n
As an employer-sponsored\naccount, your employers may also put money into your 401(k) plans, often\nmatching your contribution in the account or up to 10% of your salary (whichever\nis lower). Some employers even offer to make a contribution on behalf of the employee.\nAs per a 2019 report from the Vanguard Group, nearly half of the employers made\nmatching contributions, an average of 3% of the employee\u2019s salary, towards their\n401(k) plan.<\/p>\n\n\n\n
A company that offers a\n401(k) plan invests the funds, typically in a mutual fund of the investor’s\nchoice. The employee may choose from a variety of funds ranging from index\nfunds, large-cap funds, foreign funds, real estate funds, or even bond funds.\nThe investment is made with a long-term horizon in mind and the amount invested\nis tax-deferred; in other words, the investor needs to pay tax only upon\nwithdrawal, once he or she has retired.<\/p>\n\n\n\n
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