401(K)

A 401(K) is a retirement savings account that is typically offered by American employers. When employees are hired by an employer, if they agree to sign up for a 401(K), they will have a certain percentage of each of their paychecks invested into a retirement account. Some employers will match a portion or the entirety of an employee's contributions to their 401(K), depending on the stipulation outlined in a workerʻs employment contract. With a traditional 401(K), an employeeʻs contributions to their 401(K) come directly from their paycheck before income taxes are deducted. Therefore, no taxes are due on the money contributed to the employeeʻs 401(K) until they withdraw money from their 401(K). With a Roth 401(K), an employeeʻs contributions to their 401(K) come from their paycheck after income taxes are deducted. Therefore, when an employee goes to withdraw money from their 401(K) they will not have to pay any additional taxes.