What is a 401(k)?

From paycheck to account

You choose a deferral amount or percentage through your employer’s process. The employer withholds it from eligible pay and deposits it into the plan. Your account is then invested according to the instructions you select—or, if you do not make an election, the plan’s default investment arrangement. Deposits, investment gains, and losses change the account value. Neither the account label nor a contribution rate guarantees a particular retirement income.

The IRS distinguishes traditional elective deferrals, which are generally excluded from federal income-taxable wages when contributed, from designated Roth deferrals, which are included in current federal taxable income. Traditional distributions are generally taxable; Roth investment earnings are tax-free only for a qualified distribution under the tax rules. Social Security and Medicare payroll taxes generally still apply to traditional deferrals.

The account is part of a plan

A 401(k) does not have one universal contribution match, vesting schedule, investment menu, withdrawal rule, or fee. Employers can offer different plan designs. Your summary plan description (SPD) explains major provisions in plain language. For an ERISA-covered plan, the plan administrator must provide the SPD to participants; the Department of Labor explains how to request plan documents.

What to look for in plan materials

• Eligibility and enrollment: when you can participate, how enrollment works, and how to change your election.
• Contributions: traditional, Roth, after-tax or other contribution types the plan offers, and any payroll deadlines.
• Employer contributions: the match formula, the definition of eligible compensation, and whether a year-end true-up is described.
• Vesting: which employer contributions are immediately yours and whether other employer contributions vest over time.
• Investments and costs: the available options, risk information, investment expenses, and account-level or plan fees.
• Access and transitions: loan or distribution provisions, and what happens to the account after leaving the employer.

Traditional and Roth are tax labels, not investments

Traditional and Roth describe when certain taxes generally apply to employee deferrals. They do not name an investment or predict which tax treatment will be more favorable for you. A plan can offer both, one, or neither. Tax results depend on current law and personal facts; the handbook does not choose between them.

Primary references: IRS: 401(k) plans, IRS: designated Roth accounts, and U.S. Department of Labor: plan information.