401(k)

A retirement savings account offered through your employer, paid into straight from your paycheck.

A 401(k) is a retirement account set up by an employer. You choose a percentage of each paycheck to put in, and it comes out before the money reaches your bank account.

In a traditional 401(k), contributions go in before income tax, which lowers your taxable pay now; you pay tax when you take the money out in retirement. In a Roth 401(k), you pay tax now and qualified withdrawals in retirement are tax-free.

Many employers add a match, such as 50 cents for every dollar you put in up to a set percentage of your pay. Contributing at least enough to get the full match is commonly recommended, since it's money you'd otherwise leave behind. The IRS sets a yearly contribution limit, and taking money out early usually means taxes and a penalty.