What is a 401(k) plan?

Many employers sponsor a retirement savings plan for their employees. Under these plans, also commonly known as defined contribution plans, you can save money toward your retirement on a tax-deferred basis – that is, you don’t pay federal or state income taxes on your savings or their investment earnings until you withdraw the money at retirement.

Most people’s taxable income – and therefore, their tax rate – is lower at retirement than during employment, so they end up paying considerably less in taxes on their savings.

The most common types of employer-sponsored retirement savings plans are called 401(k), 403(b) or 457 plans – so named for the Internal Revenue Service tax codes that govern them – and Thrift Savings Plans. Each has a different target audience:

• 401(k) plans are offered to employees of public or private for-profit companies.
• 403(b) plans are offered to employees of tax-exempt or non-profit organizations, such as public schools, colleges, hospitals, libraries, philanthropic organizations and churches.
• 457 plans are offered to employees of state and local municipal governments (and some local school and state university systems).
• Thrift Savings Plans are offered to federal civilian and uniformed services employees.

These plans have many features in common, although contribution limits, vesting schedules for employer-matching contributions, investment options and other details may differ, so be sure to read the plan documents for your particular plan carefully.

Please Note: While similar across all plan types, the information provided in this section applies specifically to 401(k) plans and their rules, unless otherwise noted.