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What is a 401(k)?

A 401(k) is typically offered by employers to their employees.  In 2023, the maximum annual contribution for a 401(k) is $22,500. With a 401(k), your employer may offer a matching contribution, which means they will match a portion of your contributions. This is essentially free money and can significantly boost your retirement savings. 401(k) plans often have a limited selection of investment options chosen by the employer, such as mutual funds. 

A qualified retirement plan available to eligible employees of companies. 401(k) plans allow eligible employees to defer taxation on a specific percentage of their income that is to be put toward retirement savings; taxes on this deferred income and on any earnings the account generates are deferred until the funds are withdrawn—normally in retirement. Employers may match part or all of an employee’s contributions. Employees may be responsible for investment selections and enjoy the direct tax savings.

*Withdrawals from 401(k) plans and most other tax-deferred retirement plans are taxed as ordinary income and if taken prior to age 59 ½, may be subject to an additional 10% federal tax penalty and possibly state income taxes.

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