Introduction to Retirement Accounts

A 401(k) is a type of employer-sponsored retirement savings plan in the United States. It allows employees to contribute a portion of their pre-tax salary to the plan, and these contributions are invested. Employers often match a percentage of these contributions. Withdrawals are then taxed as ordinary income. It's a key tool for long-term retirement savings, providing tax advantages and potential employer contributions. Some employers match a percentage of the employee's contributions, which can significantly boost retirement savings. The IRS sets annual contribution limits. Contributions are tax-deductible, reducing taxable income for the year. However, withdrawals in retirement are taxed as ordinary income. Traditional IRA withdrawals are generally taxed, while Roth IRA withdrawals in retirement are tax-free. Pensions provide a predetermined monthly benefit based on factors like salary history and years. Pensions have become less common in the private sector, with many companies favoring defined contribution plans like 401(k)s. Understanding the nuances of each retirement account helps individuals make informed decisions aligned with their financial future.