A 401K is a type of deferred contribution retirement plan that is sponsored by an employer, which allows employees to defer taxable income through automatic payroll deductions. How does it work? Participants elect to invest a portion of their paycheck into an investment account on a pre-tax basis. The balance of these funds will grow tax-deferred until they are withdrawn at a later date.
The goal of the 401K plan is to allow participants to save for their retirement by slowly accumulating a balance of money that can be used as a source of income once they are no longer working.