What is 401(k)?
A 401(k) is a retirement plan offered through an employer. Employees choose to defer part of each paycheck into the plan; traditional contributions are pre-tax (lowering taxable income now), while Roth contributions are after-tax (tax-free in retirement). Many employers match a percentage of contributions.
The IRS caps annual employee deferrals ($24,500 in 2026, with an extra catch-up for those 50+). Contributions and any match are handled through payroll, so accurate deduction setup matters.
In practice
An employee earning $5,000/month defers 6% ($300) to a traditional 401(k). Their taxable wages drop to $4,700, and a 50% employer match adds another $150 to their retirement account.