What characterizes a 401(k) plan?

A 401(k) plan is specifically characterized as a tax-advantaged retirement savings plan offered by employers. This type of plan allows employees to make contributions directly from their paycheck before taxes are taken out, reducing their taxable income for the year. Additionally, employers often match contributions, providing an incentive for employees to save more for retirement.

The tax advantages include tax-deferred growth, meaning the investments grow without being taxed until withdrawals are made, typically during retirement when individuals may be in a lower tax bracket. This design not only encourages savings but also helps individuals prepare financially for their retirement years.

Other options do not accurately represent the characteristics of a 401(k) plan. For instance, calling it an individual investment account overlooks the employer involvement essential to a 401(k). Describing it as a type of traditional savings account fails to capture the retirement-focused, tax-deferred nature of a 401(k). Lastly, stating it is solely an investment in stocks neglects the variety of investment options available within a 401(k), which can include bonds, mutual funds, and other assets, depending on the plan’s offerings.