Financial Terms Everyone Should Know – 401(K) & Savings Plan

A 401(k) is a workplace retirement savings plan that allows tax advantages. Employees may contribute a percentage of their pay to the plan and many employers will match a portion of the employee’s contributions making the fund grow even faster. A traditional 401(k) allows the employee to make a pre-tax contribution that will result in an immediate tax savings but will result in taxable withdrawals in retirement. Many employers offer a Roth option for the 401(k). A Roth 401(k) is funded with after tax dollars but allow for tax free withdrawals in retirement. The IRS limits the 2024 contributions to $23,000, but for taxpayers 50 and older, an additional $7,000 Catch-Up contribution can be made, bringing the maximum contribution to $30,000. The particular investment options available are managed by the company’s plan.

Some employers offer slightly different plans known as 403(b) for public schools and some tax-exempt organizations and 457(b) plans are offered to many state and local government and some tax-exempt organizations, and 457(f) plans are offered as a deferred salary plan to highly compensated executives in tax-exempt organizations.

The Thrift Savings Plan (TSP is the federal government’s 401(k) type plan for federal employees and military members. Participants of the TSP can choose from five basic types of investments or into a Lifecycle Fund that is a diversified portfolio of the five types of funds professionally designed to adjust your investments from higher risk and reward to lower risk and reward as you get closer to a predetermined target date. You can learn even more about the Thrift Savings Plan on the Thrift Savings Plan website.

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