A 401(k) is an employer-sponsored retirement plan that allows employees to put a certain percentage of their salary into a tax-advantaged account and then decide how they want to invest.
These types of plans are the most common retirement benefits offered to employees, according to a recent report from the Transamerica Center for Retirement Studies. More than half of employers offer a 401(k) or similar type of defined contribution plan, per Transamerica. Nearly 90% of companies with more than 100 employees have one, compared to 46% of small companies.
There’s a good reason for that: employees love them. About 80% of workers participate in a 401(k)-type plan when offered, by Transamerica, saving 12% of their salary.
Why do employers offer them? The three main reasons include:
- Help employees save and prepare for retirement (57%)
- Increase employee job satisfaction (55%)
- Retain employees (50%)
There are two main types: traditional 401(k)s and Roth 401(k).
In a traditional 401(k), contributions are made before income taxes are applied, reducing your current tax bill for Uncle Sam. Your account then grows tax-free over time. and is subject to income tax when you withdraw from your account.
A Roth 401(k) works in reverse. You pay the taxes in advance and you will never have to send a check to Washington again. This option makes sense for those in a lower tax bracket than they imagine they will be in when they start taking money out of their retirement account, usually decades in the future. .