401(k)
Definition
An employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars from their paycheck. Contributions reduce your taxable income in the year they're made. For 2025, the contribution limit is $23,500 ($31,000 if age 50 or older). Many employers offer matching contributions. Withdrawals in retirement are taxed as ordinary income.
Example
If you earn $80,000 and contribute $10,000 to your 401(k), your taxable income drops to $70,000, saving you $2,200 if you're in the 22% bracket. If your employer matches 50%, that's an extra $5,000 in free money.