What is a 401(k) plan?

A 401(k) plan is a retirement savings plan that is specifically designed to allow employees to save for their retirement with pre-tax income, meaning the contributions made to the plan are deducted from the employee's taxable income for the year. This pre-tax funding provides an immediate tax benefit since it lowers the employee's taxable income, thus potentially reducing the overall tax burden during their working years.

Additionally, the funds in a 401(k) can grow tax-deferred until withdrawal, typically during retirement, when individuals may be in a lower tax bracket, allowing for further tax advantages. Many employers offer matching contributions, which can significantly enhance the employee's retirement savings.

In contrast, other options do not accurately describe a 401(k) plan. For example, a plan funded post-tax does not align with the primary feature of a 401(k), focusing on pre-tax contributions. Short-term savings plans generally do not fall within the scope of a 401(k)'s purpose, which is aimed at long-term retirement savings, nor would an insurance policy accurately represent the objectives and mechanics of a 401(k) plan.