A 401(k) is a type of “defined contribution” (DC) retirement plan: Unlike traditional “defined benefit” (DB) pensions, with DC plans employees or organization members are responsible for funding their own accounts. (Employers may contribute to their employees’ accounts too.)

With a 401(k), you can have a portion of your wages deducted from your paycheck and invested in a range of mutual funds and sometimes other investments. Other defined contribution plans include 403(b)s (available to some public school and hospital employees) and 457(b)s (for some government and nonprofit workers).

401(k)s and similar plans offer important tax advantages: In a traditional 401(k), you contribute pretax dollars, and the account can grow tax deferred until you withdraw from it, typically in retirement. At that point, you’ll owe regular income tax at your then-current rate.

You may also be able to choose a Roth 401(k): You contribute money that’s already been taxed, but distributions are tax free if you hold the account at least five years and meet other criteria.

• Investment types: A 401(k) plan allows you to choose your investments. Typically, you can pick from a menu of mutual funds that invest in stocks or bonds, “target-date” funds that hold a broad range of investments and grow more conservative over time, and sometimes funds that hold shares of the employer’s stock.
• Contribution limits: In 2022, the IRS says you can contribute up to $20,500 to your 401(k) ($27,000 if you’ll be at least age 50 by Dec. 31). There’s also a combined limit on how much an employee and employer can contribute each year.
• Vesting: This refers to how much of the account you own. Your contributions (and their earnings) are always yours to keep. But your employer may have a vesting schedule for their contributions (and related earnings) to encourage you to stay at the company. For example, you might become fully vested after you’ve been employed for three years—after that, you’d own the entire account even if you leave your job. Or, you might vest incrementally—say, 25% after one year, 50% after two years and so on.
• Portability: When you leave a company, you’ll typically have four options: keep your money in the employer’s plan; roll some or all of your account over to your new employer’s 401(k) or to your own individual retirement account(IRA), or cash it out (this will trigger income taxes and a possible early-withdrawal penalty, so do it only if you absolutely need the money).
• Required minimum distributions (RMDs): Traditional and Roth IRAs, along with 401(k)s (unless you’re still working for the employer), have a federally required minimum amount you must withdraw each year, starting at age 72.