What's a 401(k)?
A 401(k) is an employer-based retirement plan enabling eligible employees to save and invest a portion of their earnings, deducted from their gross pay and placed into a dedicated account.
In 2024, employees under 50 can contribute up to $23,000 ($22,500 in 2023) to their 401(k). Those over 50 can add an extra $7,500 as a catch-up contribution.
Roth 401(k)
A Roth 401(k) is an employer-sponsored retirement plan where eligible employees can save and invest a portion of their post-tax paycheck. Contributions are subtracted from the employee's earnings after federal and state taxes are applied. When deductions depend on a percentage, the calculation uses gross pay to determine the deduction from the employee's net pay.
In certain cases, employers might match a portion of the employee's contribution, up to a specific percentage. The highest amount an employee below 50 can contribute is $23,000 in 2023 ($22,500 in 2023). If the employee is 50 or older, they can add an extra catch-up contribution of $7,500 in 2024 ($7,500 in 2023).
Additional 401(k) Definitions
1. Custodian: The financial institution responsible for safeguarding the 401(k) funds.
2. Plan participant: An employee actively enrolled in the 401(k) plan.
3. Plan sponsor: The designated administrator overseeing the employer's 401(k) plan.