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Personal Finance > Retirement How does a 401(k) plan work?

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401K A 401K is a retirement plan sponsored by your employer. It is a defined contribution plan where you contribute a certain portion of your income into the account. 401K accounts are popular because of two main reasons. As a retirement investment, the 401K has both advantages and disadvantages: Pros: Tax deferred until withdrawal. Possibility of additional contributions from employers Cons: Withdrawal penalties of 10% with certain exceptions. Lack of liquidity if the contributor needs the money for another purpose. A further comparison of a 401K plan with other investments can be found h...

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