What is a 401(k) plan?

A 401(k) plan is indeed a retirement savings plan that enables employees to contribute a portion of their earnings before tax is deducted. This pre-tax contribution means that the money is taken out of the employee’s paycheck and deposited into the 401(k) account before it is taxed, which can lead to a lower taxable income for the year in which the contributions are made.

The contributions can also accumulate over time through investment gains, and taxes are typically only paid upon withdrawal during retirement. This tax-deferred growth can be a significant advantage as it allows the savings to potentially grow more rapidly compared to taxable accounts where taxes are owed annually on earnings.

Additionally, many employers offer matching contributions to employees' 401(k) plans, providing an extra incentive for employees to participate in these retirement savings options. Such plans are a vital part of many people's retirement strategies, as they provide a way to save and invest specifically for the future.

In essence, the critical function of a 401(k) plan is to facilitate long-term savings for retirement, making it an essential financial tool for employees looking to secure their economic future.