(LifeWire) - Definition: The 401(k) is a popular way for private-sector employees in the United States to save for retirement.
A 401(k) can only be set up by an employer, who determines what the plan's investment options will be. Once established, employees can contribute part of their pay without paying income taxes on it, and employers can contribute as well. The money grows tax-deferred - a significant benefit - but withdrawals are taxed at regular rates.
In general, withdrawals before age 59 1/2 face a 10% penalty plus taxes. In 2008, annual contributions for most individuals were limited to $15,500, or to $20,500 for those age 50 and over.
