What is a 401(k) plan?

A 401(k) plan is a tax-advantaged retirement savings account that is designed to help employees save for their retirement with the benefit of tax deferrals on contributions and earnings. Contributions made to a 401(k) are usually deducted from an employee's paycheck before taxes are applied, which reduces the individual's taxable income for that year. Moreover, the funds in the account grow tax-deferred until withdrawal, typically after reaching retirement age, at which point taxes are applied to withdrawals.

This type of plan often includes employer contributions, such as matching contributions, which further incentivizes employees to save for their retirement goals. The structure and benefits of a 401(k) make it an essential aspect of many employees' retirement planning, distinguishing it from other types of accounts that may not offer the same tax advantages, such as a standard savings account or investment account.

In contrast, the other options do not accurately describe a 401(k) plan and reflect the distinctions between different financial tools available for savings and retirement.