What Is a 401(k)?

A 401(k) is one of those things that tends to come up when you’re talking about a job. It’s listed with the benefits, someone mentions an employer match, or you hear a coworker talk about putting part of their paycheck into one.

Basically, a 401(k) is a retirement account offered through an employer. You can choose to have some of your pay put into the account, where the money is typically invested for retirement. Depending on the plan, your employer may put money into it too.

So when someone says they’re “putting 5% into their 401(k),” they’re talking about sending 5% of their pay into that retirement account.

Your Paycheck Contribution Goes Into the Plan

Because a 401(k) comes through work, it can sound like the employer is holding the money. That’s not quite what’s happening.

Your employer makes the plan available, and payroll sends the amount you’ve chosen to contribute into your 401(k). It’s still money going toward your retirement, even though the plan comes through your job.

Some employers contribute money too, often through what is called a 401(k) match. That money goes into the plan along with the employee’s contributions. Not every employer offers a match.

Your Balance Isn’t Just Your Contributions Added Together

If $100 goes into a 401(k) from one paycheck and another $100 goes in from the next, it would be easy to picture the account as a growing pile of those deposits.

But the money in a 401(k) is typically invested. That means the investments themselves have a value, and that value can go up or down.

New contributions add more money, while the investments already in the account can rise or fall in value. Employer contributions can add to the balance as well.

That’s why a 401(k) balance can change even between paychecks. The number shown in the account isn’t simply a total of everything that has been deducted from your pay.

The 401(k) Is the Account, Not the Investment

It’s also easy to hear “401(k)” used as though it were the name of an investment. It isn’t.

The 401(k) is the workplace retirement plan. Investments are held within it. Depending on the plan, there may be different investment options available for the money contributed to the account.

Two people can both have 401(k)s without necessarily having their money invested in the same things.

There’s a lot more to 401(k)s than we could reasonably cover here, including different types of plans, taxes, contribution limits, withdrawals, and other rules. For a much more detailed look, the IRS has a full 401(k) Resource Guide for plan participants. IRS 401(k) Resource Guide for Plan Participants