Table of Contents
1. How a 401(k) Retirement Plan Operates
A 401(k) is an employer-sponsored qualified retirement plan named after subsection 401(k) of the Internal Revenue Code. It allows employees to allocate automated payroll deductions directly into tax-sheltered investment accounts before paychecks hit their bank account.
2. The Math Behind the 100% Return Employer Match
Never leave employer matching funds on the table. Consider an employee earning $75,000 whose employer offers a dollar-for-dollar match up to 5% of gross pay. By contributing $3,750 over the year, the employer deposits an additional $3,750 into the account—an instant 100% return on invested capital before any market growth takes place.
Key Takeaways
- Always contribute at least enough to capture your employer's full matching formula.
- Pre-tax 401(k) contributions lower your current taxable income on Form W-2.
- Review the expense ratios of your plan's investment options to avoid high-fee actively managed funds.