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401(k) Contribution Limits for Small Business Owners: A Comprehensive Guide
Author: Dr. Eleanor Vance, CFP®, CPA
Dr. Vance is a Certified Financial Planner® (CFP®) and Certified Public Accountant (CPA) with over 20 years of experience advising small business owners on retirement planning and tax strategies. She holds a PhD in Financial Economics and is a frequent speaker at industry conferences on the topic of retirement savings for self-employed individuals.
Publisher: The National Association of Small Business Owners (NASBO)
NASBO is a respected non-profit organization dedicated to supporting and advocating for small business owners across the United States. They publish numerous resources and conduct extensive research on topics relevant to small business operations, including retirement planning and tax implications. Their authority stems from their direct engagement with small business owners and their deep understanding of the challenges and opportunities they face.
Editor: Mark Thompson, MBA, CFA
Mark Thompson holds an MBA and is a Chartered Financial Analyst (CFA). He has over 15 years of experience in financial publishing and editing, specializing in retirement planning and investment strategies. His expertise ensures the accuracy and clarity of the information presented.
Keywords: 401(k) contribution limits for small business owners, small business retirement plan, solo 401(k), SEP IRA, SIMPLE IRA, self-employed retirement, retirement savings for small business owners, maximum 401k contributions, 401k contribution limits 2024, 401k plan for small business
Introduction:
Understanding the intricacies of 401(k) contribution limits for small business owners is crucial for securing a comfortable retirement. Unlike employees of larger corporations who typically have employer-sponsored 401(k) plans with matching contributions, small business owners often bear the full responsibility of funding their retirement. Navigating the complexities of contribution limits, IRS regulations, and various retirement plan options requires careful planning and informed decision-making. This article provides a detailed analysis of 401(k) contribution limits for small business owners, exploring its historical context, current regulations, and future implications.
Historical Context of 401(k) Contribution Limits
The history of 401(k) plans reveals a gradual increase in contribution limits reflecting both economic growth and the increasing need for retirement savings. Initially, limits were significantly lower, reflecting a less generous tax environment and a different understanding of retirement needs. Over time, as life expectancies increased and the cost of living rose, contribution limits have been adjusted upward to keep pace. This upward trend reflects a broader societal recognition of the importance of retirement savings and the need to provide adequate resources for older generations. The legislative adjustments also reflect a response to economic factors, such as inflation and changing retirement expectations. Analyzing this historical trend allows small business owners to appreciate the long-term perspective needed for successful retirement planning.
Current 401(k) Contribution Limits for Small Business Owners (2024)
For 2024, the IRS sets the maximum contribution limits for 401(k) plans. These limits are divided into two main components:
Employee Contributions: The maximum amount an employee can contribute to their 401(k) is $23,000.
Employer Contributions (for solo 401(k)s): For small business owners, who often act as both employee and employer, this is where things get interesting. They can contribute as the employee (up to $23,000), and additionally contribute as the employer. The total contribution amount, combining both employee and employer contributions, cannot exceed $66,000 for 2024.
Important Note: Individuals age 50 and older are eligible for an additional "catch-up" contribution. For 2024, this additional contribution is $7,500, bringing the total maximum employee contribution to $30,500. The catch-up contribution does not apply to the employer contribution limit.
Types of 401(k) Plans for Small Business Owners
Small business owners have several options when it comes to 401(k) plans:
Solo 401(k): This is a popular choice for self-employed individuals and small business owners with no employees. It allows the owner to contribute both as an employee and as an employer. This flexibility makes it a powerful tool for maximizing retirement savings. Understanding the 401k contribution limits for small business owners utilizing this plan type is crucial for optimal utilization.
SIMPLE IRA: A Simplified Employee Pension plan is simpler to administer than a solo 401(k) but generally offers lower contribution limits. This can be suitable for very small businesses. While not strictly a 401(k), it's often considered in the same context.
SEP IRA: A Simplified Employee Pension plan is another relatively simple option with lower contribution limits than a solo 401(k). It allows employers to contribute a percentage of an employee's compensation, but it's less flexible than a solo 401(k).
Choosing the right plan depends on factors like the number of employees, administrative capabilities, and desired contribution levels. A financial advisor can help navigate these choices based on an individual's specific circumstances.
Tax Implications of 401(k) Contributions for Small Business Owners
Contributions to a 401(k) are tax-deductible, meaning the contribution amount reduces the business's taxable income. This tax advantage is a significant incentive for small business owners to maximize their contributions. However, it's essential to understand the specific tax implications based on the chosen plan type and consult with a tax professional to ensure compliance. The tax benefits can significantly impact the overall financial strategy of a small business owner.
Future Outlook for 401(k) Contribution Limits for Small Business Owners
Predicting future contribution limits is challenging, but analyzing historical trends suggests a continuation of gradual increases. Inflation, economic growth, and evolving retirement expectations will likely influence future adjustments. Staying informed about legislative changes and IRS updates is crucial for small business owners to optimize their retirement savings strategies.
Conclusion:
Understanding the 401(k) contribution limits for small business owners is paramount for securing a financially comfortable retirement. The various plan options, along with their contribution limits and tax implications, require careful consideration. Small business owners should actively engage with financial advisors and tax professionals to develop comprehensive retirement strategies that leverage the tax advantages of 401(k) plans and align with their individual financial goals and circumstances. Proactive planning and regular review of these limits are essential to maximizing retirement savings.
FAQs:
1. What is the difference between a solo 401(k) and a traditional 401(k)? A solo 401(k) is designed for self-employed individuals and small business owners with no employees, while a traditional 401(k) is typically offered by larger employers.
2. Can I contribute to both a SEP IRA and a solo 401(k)? No, you cannot contribute to both a SEP IRA and a solo 401(k) for the same tax year. You must choose one or the other.
3. What happens if I exceed the 401(k) contribution limits? Exceeding the limits will result in penalties and taxes on the excess contributions.
4. Are there penalties for early withdrawal from a 401(k)? Yes, early withdrawals are usually subject to a 10% penalty, in addition to income taxes.
5. How are contributions to a solo 401(k) taxed? Contributions are tax-deductible, reducing your taxable income. However, the money grows tax-deferred, meaning you only pay taxes when you withdraw it in retirement.
6. Can I change my contribution amount during the year? You may be able to adjust your contributions, but the rules vary depending on the plan. Consult your plan provider.
7. What if my business income fluctuates? You can adjust your 401(k) contributions each year based on your income, allowing for flexibility.
8. What are the vesting rules for a solo 401(k)? As the owner, you are fully vested in your contributions.
9. Where can I find the most up-to-date information on 401(k) contribution limits? The IRS website is the most reliable source for current and official information.
Related Articles:
1. "Optimizing Your Solo 401(k) for Maximum Retirement Savings": This article explores strategies for maximizing contributions to a solo 401(k) plan and taking advantage of all available tax benefits.
2. "Solo 401(k) vs. SEP IRA: Which Retirement Plan is Right for You?": This piece compares the two most popular retirement plans for the self-employed, outlining their advantages and disadvantages.
3. "Understanding the Tax Advantages of 401(k) Contributions for Small Businesses": This article focuses on the tax benefits associated with 401(k) contributions, helping business owners understand their financial impact.
4. "Navigating 401(k) Rollovers for Small Business Owners": This piece provides guidance on how to transfer funds from one 401(k) plan to another, addressing potential challenges and considerations.
5. "Retirement Planning Strategies for Small Business Owners with Multiple Income Streams": This article addresses retirement planning for individuals with diverse income sources, focusing on how to effectively integrate them into a cohesive strategy.
6. "The Impact of Inflation on Retirement Savings for Small Business Owners": This article analyzes how inflation affects retirement savings goals and explores strategies to mitigate its impact.
7. "Choosing the Right Financial Advisor for Your Small Business Retirement Plan": This article discusses how to select a financial advisor who is well-versed in small business retirement plan options.
8. "401(k) Investment Strategies for Small Business Owners": This article provides an overview of appropriate investment strategies for the long-term growth of a 401(k) portfolio.
9. "Estate Planning Considerations for Small Business Owners and their 401(k)s": This piece explains how a 401(k) plan integrates into a comprehensive estate plan, focusing on potential tax and inheritance implications.
| 401k contribution limits for small business owners: Retirement Plans for Self-employed Individuals United States. Internal Revenue Service, 1996 |
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| 401k contribution limits for small business owners: Individual retirement arrangements (IRAs) United States. Internal Revenue Service, 1990 |
| 401k contribution limits for small business owners: Self-employed Retirement Plans United States. Internal Revenue Service, 1988 |
| 401k contribution limits for small business owners: Self-employment Tax , 1988 |
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| 401k contribution limits for small business owners: A Look at 401(k) Plan Fees , 2010 |
| 401k contribution limits for small business owners: U.S. Tax Guide for Aliens , 1998 |
| 401k contribution limits for small business owners: The Self Directed IRA Handbook Mat Sorensen, 2013-12-30 The Self Directed IRA Handbook explains how investors can own alternative retirement plan assets in their IRAs. These assets typically include; real estate, private stock, IRA/LLCs, LP, LLC, private equity, hedge funds, private placement, crowdfunding, and precious metals. The Handbook clearly explains the prohibited transaction rules, investment structures, common self directed IRA investment assets, and SDIRA tax pitfalls (UBIT & UDFI tax). The Handbook goes beyond the basics of self directed IRAs and includes extensive FAQs after each chapter, and nearly 100 citations to cases, statutes, rulings, and opinions from the Courts, the IRS, and the DOL. Its author, Mat Sorensen, is an experienced attorney who has advised clients with IRAs at every major self directed IRA custodian, and who speaks frequently at industry associations and before professional groups on self directed IRA topics. Mat regularly advises clients on the prohibited transaction rules, on IRA/LLC structures, on real estate and private company investments, and on UBIT and UDFI taxes. Mat has also successfully represented self directed IRA owners before the IRS Appeals Office and the U.S. Tax Court. To view testimonials for the book, and for additional self directed IRA resources, please visit the author's site at www.sdirahandbook.com |
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| 401k contribution limits for small business owners: Soldier of Finance Jeff Rose, 2013-09-03 Too much debt? Not enough savings? It's time to become a battle-ready financial warrior, prepared to tackle any money challenge. Modeled on the Soldier's Handbook, which is issued to all new U.S. Army recruits, Soldier of Finance is a no-nonsense, military-style training manual to overcoming financial obstacles and building lasting wealth. Financial planner and experienced army veteran Jeff Rose has divided this book into 14 modules, each section covering an essential element of financial success. You will learn how to: Evaluate your position and commit to change Target and methodically eliminate debt Clean up your credit report Create tactical budgets Build emergency savings Invest for the short and long term Determine an affordable mortgage size, insurance needs, and more. Complete with tales from the trenches and useful tools including quizzes, debriefings, and more, Soldier of Finance is the survival guide you need to face down your finances and bring order and prosperity to your life. |
| 401k contribution limits for small business owners: Retirement the Right Way Clint Haynes, 2022-02 Retirement is one of the most significant changes that can happen over the course of a human life. So why don't we give it the thought and attention it deserves? Most of us focus just on the financial piece, and getting across the finish line. But what will it really mean for you to exit the workforce and retire?Clint Haynes' seminal book offers a balanced perspective on retiring. In it, you will hear from folks of all walks of life, how they navigated their retirement transition, and what they learned about themselves in the process. It includes 27 Essential Questions to Ask Yourself Before You Retire that will challenge you to look at your blind spots and help clarify and simplify your future.RETIREMENT THE RIGHT WAY is your comprehensive roadmap to retiring well. It collaborates with you to design your best plan for a smooth, secure transition into retirement... and how to enjoy it fully once you're in. |
| 401k contribution limits for small business owners: The Pocket Small Business Owner's Guide to Taxes Brian Germer, 2012-11-13 When does nontaxable business income become taxable? How do you calculate the cost of goods sold? What can be deducted? What is a fixed asset? This no-nonsense guide answers these common questions and more, empowering small business owners to understand how and why they are taxed and maximize their deductions. You’ll learn when depreciation begins, how to classify payments to employees, how to track inventory and sales, and strategies for successful accounting. Coverage also includes: Tax benefits for employers Business classifications S corporation tax issues Deductible expenses Retirement plans Shareholder loans Family employee payroll And more Taxes can be intimidating and confusing, especially for a small business owner who may have only handled individual taxes in the past. Understanding the tax system is essential for all small business owners, whether they are filing on their own or with the help of an accountant. When it comes to running your finances, knowledge is power, and The Pocket Small Business Owner's Guide to Taxes puts the power in your hands! |
| 401k contribution limits for small business owners: Favorable Determination Letter United States. Internal Revenue Service, 1998 |
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| 401k contribution limits for small business owners: Tax Withholding and Estimated Tax , 1993 |
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| 401k contribution limits for small business owners: Savings Fitness Barry Leonard, 2007-12 Many people mistakenly believe that Social Security (SS) will pay for all or most of their retire. needs, but the fact is, since its inception, SS has provided little protection. A comfortable retire. usually requires SS, pensions, personal savings & invest. The key tool for making a secure retire. a reality is financial planning. It will help clarify your retire. goals as well as other financial goals you want to ¿buy¿ along the way. It will show you how to manage your money so you can afford today¿s needs yet still fund tomorrow¿s. You¿ll learn how to save your money to make it work for you & how to protect it so it will be there when you need it. Explains how you can take the best advantage of retire. plans at work, & what to do if you¿re on your own. Illustrations. |
| 401k contribution limits for small business owners: Reasonable Compensation Anne E. Moran, ... analyzes the issues relating to the deduction by an employer for a reasonable allowance under [section] 162(a) for compensation paid with regard to personal services rendered. It discusses in depth the factors applied in determining reasonableness, the necessity for the actual performance of services, situations where a deduction for reasonable compensation is not allowable, and other aspects of reasonable compensation. Various tax planning and controversy considerations also are discussed--Portfolio description (p. iii). |
| 401k contribution limits for small business owners: Federal Pension Insurance Guide for Small Business Pension Benefit Guaranty Corporation, 2009 If you sponsor or administer a defined benefit pension plan, it is probably covered by the federal pension insurance program administered by the Pension Benefit Guaranty Corporation. PBGC prepared this Guide to help you and your professional advisers understand the PBGC requirements. |
| 401k contribution limits for small business owners: Pension and Annuity Income United States. Internal Revenue Service, 1990 |
| 401k contribution limits for small business owners: Medical and Dental Expenses , 1990 |
| 401k contribution limits for small business owners: The 4-hour Workweek Timothy Ferriss, 2011 How to reconstruct your life? Whether your dream is experiencing high-end world travel, earning a monthly five-figure income with zero management, or just living more and working less, this book teaches you how to double your income, and how to outsource your life to overseas virtual assistants for $5 per hour and do whatever you want. |
| 401k contribution limits for small business owners: How to Start a Business in Colorado Entrepreneur Press, 2007-07-09 SmartStart Your Business Today! How to Start a Business in Colorado is your road map to avoiding operational, legal and financial pitfalls and breaking through the bureaucratic red tape that often entangles new entrepreneurs. This all-in-one resource goes a step beyond other business how-to books to give you a jump-start on planning for your business. It provides you with: Valuable state-specific sample forms and letters on CD-ROM Mailing addresses, telephone numbers and websites for the federal, state, local and private agencies that will help get your business up and running State population statistics, income and consumption rates, major industry trends and overall business incentives to give you a better picture of doing business in Colorado Checklists, sample forms and a complete sample business plan to assist you with numerous startup details State-specific information on issues like choosing a legal form, selecting a business name, obtaining licenses and permits, registering to pay taxes and knowing your employer responsibilities Federal and state options for financing your new venture Resources, cost information, statistics and regulations have all been updated. That, plus a new easier-to-use layout putting all the state-specific information in one block of chapters, make this your must-have guide to getting your business off the ground. |
| 401k contribution limits for small business owners: Copywriting - Handbuch Digital World, 2024-04-03 Copywriting ist eine Arbeit zu diesem zum Nachdenken anregenden Thema. Entdecken Sie hier in diesem E-Book die mentalen Auslöser mit praktischen Beispielen und dem Angebot von mehr als 10 äußerst nützlichen Boni, Modellen wie AIDA, der Pareto-Formel und anderen wichtigen Themen. Es ist das Nachtbuch für jeden, der seine Kommunikation so gestalten muss, dass sie Dutzende, Hunderte, Tausende von Kunden anspricht. Erfahren Sie hier in diesem E-Book auf einfache, direkte und objektive Weise alles, was Sie brauchen, um der begehrteste Mann aller Werbeagenturen zu werden! |
| 401k contribution limits for small business owners: Estimates of Federal Tax Expenditures United States. Congress. Joint Committee on Internal Revenue Taxation, United States. Congress. House. Committee on Ways and Means, 1976 |
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| 401k contribution limits for small business owners: Mutual Funds iMinds, Learn about Mutual Funds with iMinds Money's insightful fast knowledge series. A mutual fund is an investment vehicle that allows a group of investors to pool their money, allowing a professional to collectively trade securities on their behalf in exchange for a small fee. The pooled funds are used to purchase a diverse range of assets and provide a return to the investor. Typically the assets purchased are shares of companies and so reflect share market movements, but some funds focus on other markets such as property. Although the term 'mutual fund' has specific meaning in United States law, |
| 401k contribution limits for small business owners: QDROs , 1997 |
| 401k contribution limits for small business owners: The Price You Pay for College Ron Lieber, 2021-01-26 Named one of the best books of 2021 by NPR New York Times Bestseller and a New York Times Book Review Editor’s Choice pick “Masterly . . .represents an extraordinary achievement: It is comprehensive and detailed without being tedious, practical without being banal, impeccably well judged and unusually rigorous.”—Daniel Markovits, New York Times Book Review “Ron Lieber is a gift.”—Scott Galloway The hugely popular New York Times Your Money columnist and author of the bestselling The Opposite of Spoiled offers a deeply reported and emotionally honest approach to the biggest financial decision families will ever make: what to pay for college—a decision made even more confusing because of the Covid-19 pandemic. Sending a teenager to a flagship state university for four years of on-campus living costs more than $100,000 in many parts of the United States. Meanwhile, many families of freshmen attending selective private colleges will spend triple—over $300,000. With the same passion, smarts, and humor that infuse his personal finance column, Ron Lieber offers a much-needed roadmap to help families navigate this difficult and often confusing journey. Lieber begins by explaining who pays what and why and how the financial aid system got so complicated. He also pulls the curtain back on merit aid, an entirely new form of discounting that most colleges now use to compete with peers. While price is essential, value is paramount. So what is worth paying extra for, and how do you know when it exists in abundance at any particular school? Is a small college better than a big one? Who actually does the teaching? Given that every college claims to have reinvented its career center, who should we actually believe? He asks the tough questions of college presidents and financial aid gatekeepers that parents don’t know (or are afraid) to ask and summarizes the research about what matters and what doesn’t. Finally, Lieber calmly walks families through the process of setting financial goals, explaining the system to their children and figuring out the right ways to save, borrow, and bargain for a better deal. The Price You Pay for College gives parents the clarity they need to make informed choices and helps restore the joy and wonder the college experience is supposed to represent. |
| 401k contribution limits for small business owners: Qualified Business Income Deduction Elliot Pisem, Stuart J. Gross, Ellen S. Brody, Vivek Chandrasekhar, ...discusses a new provision of the Internal Revenue Code, §199A, which provides a 20% deduction for qualified business income, qualified publicly traded partnership income, qualified REIT dividends, and income of, or received from, certain agricultural or horticultural cooperatives. The Portfolio describes the requirements that taxpayers must meet in order to qualify for the deduction, the complex rules that limit taxpayers’ eligibility for the deduction, and the many uncertainties that taxpayers and their advisers face in interpreting the statute. |
| 401k contribution limits for small business owners: Financial Peace Dave Ramsey, 2002-01-01 Dave Ramsey explains those scriptural guidelines for handling money. |
| 401k contribution limits for small business owners: Independent Contractor, Sole Proprietor, and LLC Taxes: Explained in 100 Pages Or Less Mike Piper, 2019-07-05 Find all of the following, explained in plain-English with no legal jargon: Business Taxation 101: A brief primer on tax topics in general, especially as they apply to businesses. Home Office Deduction: How to ensure you qualify for it and how to calculate it. Estimated Tax payments: When and how to pay them, as well as an easy way to calculate each payment. Self-Employment Tax: What it is, why it exists, and how to calculate it. Business Retirement Plans: What the different types are, and which one is best for you. Numerous Business Deductions: Several deductions explained in detail, including how to make sure you can qualify to take them and how to maximize them. Audit Protection: Learn what records you need to keep (and how long to keep them) in order to protect yourself in case of an audit. |
| 401k contribution limits for small business owners: The White Coat Investor's Financial Boot Camp James M. Dahle, 2019-03 Doctors and other high income professionals receive little training in personal finance, investing, or business. This book teaches them what they did not learn in school or residency. It includes information on insurance, personal finance, budgeting, buying housing, mortgages, student loan management, retirement accounts, taxes, investing, correcting errors, paying for college, estate planning and asset protection. |
| 401k contribution limits for small business owners: Cash Or Deferred Arrangements David L. Raish, |
Fidelity 401 (k) retirement savings | Fidelity NetBenefits
We answer the question “What is a 401 (k)?” breaking down how it works and offering answers about how to contribute to this retirement plan.
What is a 401(k)? | Fidelity - Fidelity Investments
Dec 10, 2024 · Named for the tax code section that created it, a 401 (k) is an employer-sponsored retirement savings plan with special tax benefits. (The exact tax advantages depend on which …
401(k) Plans: What Are They, How They Work - Investopedia
Jan 24, 2025 · Named after a section of the U.S. Internal Revenue Code, the 401 (k) is a defined-contribution plan provided by an employer. The employer may match employee contributions; …
401 (k) plans - Internal Revenue Service
Helps you keep your 401 (k) plan in compliance with important tax rules. Tips on how to find, fix and avoid common errors in 401 (k) plans. Learn about Internal Revenue Code 401 (k) retirement …
What Is A 401(k) A Beginners Guide – Forbes Advisor
Mar 5, 2025 · What Is A 401 (k)? How Does It Work? A 401 (k) is an employer-sponsored retirement savings plan. Commonly offered as part of a job benefits package, employees may save a portion …
401(k) - Wikipedia
In the United States, a 401 (k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401 (k) of the U.S. Internal Revenue Code. …
What is a 401 (k) and How Does It Work? - Charles Schwab
Feb 25, 2025 · What is a 401 (k) and How Does It Work? Learn how 401 (k) retirement plans work and get answers to questions on contribution limits, distributions, and more. If you're like most …
401(k) Plan Overview: Definition, How It Works, & Guidelines
2 days ago · Contribution Type Contribution Limit (2025); Employee contributions: $23,500: Catch-up contribution (employees 50 or older) $7,500: SIMPLE 401(k) contributions
What Is a 401(k) and How Does It Work? - Paycom
Dec 12, 2024 · What Is a 401 (k) and How Does It Work? Most in HR know a 401 (k) is a tax-deferred retirement savings plan for employees. But with a wave of Generation Z and millennial workers …
401(k) Plans | Definition, History, Costs, & Types - Finance …
Feb 12, 2025 · Are You Retirement Ready? A 401 (k) plan is a retirement savings account sponsored by an employer. Employees can choose to have a portion of their paycheck withheld and …
Fidelity 401 (k) retirement savings | Fidelity NetBenefits
We answer the question “What is a 401 (k)?” breaking down how it works and offering answers about how to contribute to this retirement plan.
What is a 401(k)? | Fidelity - Fidelity Investments
Dec 10, 2024 · Named for the tax code section that created it, a 401 (k) is an employer-sponsored retirement savings plan with special tax benefits. (The …
401(k) Plans: What Are They, How They Work - Investopedia
Jan 24, 2025 · Named after a section of the U.S. Internal Revenue Code, the 401 (k) is a defined-contribution plan provided by an employer. The …
401 (k) plans - Internal Revenue Service
Helps you keep your 401 (k) plan in compliance with important tax rules. Tips on how to find, fix and avoid common errors in 401 (k) plans. …
What Is A 401(k) A Beginners Guide – Forbes Advisor
Mar 5, 2025 · What Is A 401 (k)? How Does It Work? A 401 (k) is an employer-sponsored retirement savings plan. Commonly offered as part of a job …
