Tax glossary

401(k)

401 — what it means, how it works, and a real example, explained without the jargon.

What is 401(k)?

A 401(k) is an employer-sponsored retirement plan that lets you save with a significant tax advantage.

How it works

Traditional contributions come out of your paycheck before income tax, lowering your taxable wages now; you pay tax when you withdraw in retirement. Roth 401(k) contributions are after-tax but grow and withdraw tax-free. Many employers match part of what you put in.

A quick example

Contributing $10,000 to a traditional 401(k) in the 22% bracket saves $2,200 in tax this year, while still building your retirement balance.

What people get wrong

Always contribute at least enough to capture the full employer match — it's an instant 50% or 100% return on those dollars. Passing it up is leaving free money on the table.

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Frequently asked questions

What does 401 mean?

A 401(k) is an employer-sponsored retirement plan that lets you save with a significant tax advantage.

How does 401 work?

Traditional contributions come out of your paycheck before income tax, lowering your taxable wages now; you pay tax when you withdraw in retirement. Roth 401(k) contributions are after-tax but grow and withdraw tax-free. Many employers match part of what you put in.

What's the most common mistake with 401?

Always contribute at least enough to capture the full employer match — it's an instant 50% or 100% return on those dollars. Passing it up is leaving free money on the table.