A 401K is an employer sponsored retirement savings account.  When you contribute to this type of saving product you are investing for your retirement on a tax deferred bases.  The benefit is that you will pay less income tax in the year you contribute – this is done by deducting the 401K contribution from your taxable income.  Your investment grows tax-free until you withdraw it later

Most employers will match your contributions up to a specific amount (usually 6%).  A matching program encourages employees to contribute and is definitely a great employee benefit.  Basically, your employer is giving you free money to help you save for retirement.

There are penalties if you withdraw these savings before you are 60 so make sure your plan is to use this investment for retirement.  Each year there will be a maximum limit that you can contribute and for those over 50 years old there will be an additional catchup limit.  Let’s look at an example:

In 2024:
The 401K limit = $23,000 ($69,000 combined employee and employer contributions)
At age 50 years = $7,500 catch-up contributions