What is a 401(k) plan?

A 401(k) plan is a retirement savings strategy provided by employers that enables employees to contribute a portion of their earnings on a pre-tax basis. This means that the contributions are deducted from an employee's salary before income taxes are calculated, allowing for a reduction in taxable income during the year the contributions are made. This deferral of taxes means that individuals can potentially save more money in the long term, as their savings can grow without being diminished by immediate tax liabilities.

Additionally, many employers offer matching contributions to incentivize employees to save for retirement, further enhancing the benefits of a 401(k) plan. The funds invested in the plan can be allocated to various investment options, such as stocks, bonds, or mutual funds, supporting the goal of accumulating savings for retirement. This structure makes 401(k) plans a critical component of many employees' financial planning for their future.

The other options do not capture the essence of a 401(k) plan. While a personal savings account serves a general purpose for savings, it typically does not offer the same tax advantages or employer contributions. An investment account with stocks and bonds does not specifically pertain to retirement savings or employer-sponsored plans. A government-sponsored pension plan differs as it is typically managed by government