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Definition of '401(k)'

A 401(k) is a type of retirement savings plan offered by many employers in the United States. The name "401(k)" refers to the section of the Internal Revenue Code that governs this type of plan.

A 401(k) plan allows employees to save and invest a portion of their salary before taxes are taken out, and any earnings on the investment grow tax-free until the funds are withdrawn. Contributions are typically made through automatic payroll deductions, and employees can choose how much they want to contribute, up to a certain annual limit set by the IRS.

Employers may also offer matching contributions, which means that they will contribute a certain amount of money to an employee's 401(k) plan based on the amount the employee contributes. This can be a significant benefit, as it can help employees save more for retirement without having to contribute as much of their own money.

Withdrawals from a 401(k) plan are generally not allowed before age 59 1/2 without incurring a penalty, except in certain circumstances such as a financial hardship. Withdrawals are taxed as regular income, so it is important to plan for taxes accordingly.

401(k) plans can be a valuable tool for individuals to save for retirement, as they provide a tax-advantaged way to invest for the future. However, it is important to carefully consider the investment options within the plan and to regularly review and adjust the contribution amount and investment allocation to ensure that it aligns with retirement goals.

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