401(k)

A 401(k) is an employer retirement plan you pay into straight from your paycheck. A traditional 401(k) comes out before federal income tax. A Roth 401(k) comes out after tax, and qualified withdrawals later are tax-free.

The IRS sets a yearly limit on what you can defer and raises it with inflation. Workers 50 and older can add a catch-up contribution, with a higher catch-up at ages 60 to 63, and higher earners must make catch-up contributions as Roth. Employer matching does not count toward your own limit. The FAQ covers whether a 401(k) reduces taxable income.

Traditional deferrals still count for Social Security tax and Medicare. A 6% contribution on a $60,000 salary is $138.46 per two-week check and, in the 12% bracket, cuts federal withholding by $16.62. See also pre-tax deduction and the salary paycheck calculator.