What is a 401k and how does it work?

A 401k is an employer-sponsored retirement savings plan where contributions come from your pre-tax paycheck, reducing your taxable income today. In 2026, you can contribute up to $23,500 per year ($31,000 if age 50+). The money grows tax-deferred until withdrawal in retirement. Employer matching is additional free money on top of your contributions. Withdrawals before age 59½ incur a 10% penalty plus income taxes.