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# How a 401(k) Works
A 401(k) is an employer-sponsored retirement savings plan where you contribute pre-tax money from your paycheck into an investment account.
## The Basic Mechanics
Your employer deducts contributions directly from your salary before taxes are calculated, reducing your taxable income that year. You choose how much to contribute (up to annual limits set by the IRS). The money sits in an account registered under your name, and you decide how to invest it—typically choosing from mutual funds, stocks, bonds, or target-date funds your employer offers.
## Employer Match
Many employers offer matching contributions. For example, they might match 50% of what you contribute up to 6% of your salary. This is free money—it's worth capturing the full match if your employer offers it.
## Growth and Taxes
Your investments grow tax-deferred, meaning you don't pay taxes on gains until withdrawal. When you withdraw money in retirement (age 59½ or later without penalty), those withdrawals are taxed as ordinary income at your tax rate then.
## Key Restrictions
You can't access the money penalty-free before 59½ without exceptions (hardship withdrawals exist but have strict rules). Your employer controls the investment options available, and some plans have vesting schedules—meaning you might not own employer contributions immediately.
## Bottom Line
It's essentially a tax-advantaged savings account for retirement. Contribute enough to get your full employer match, then decide how much more based on your retirement goals.
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