How does a 401(k) Plan work?
Of all the retirement planning options that are available to most people, 401(k) plans has been said to be one of the best programs for accumulating retirement funds. Unlike a taxable savings vehicle, a 401(k) plan allows you to make annual pre-tax contributions up to a certain amount (Congress sets the maximum each year). Pre-tax contributions are much better for savers than after-tax contributions.
For example, if you are in the 28 percent federal marginal tax bracket, it effectively costs you only $72 of spendable income to save $100 for retirement. And it works out even better for those in higher tax brackets. And like other qualified retirement plans, a 401(k) allows your money to grow tax deferred. This enables you to build capital significantly faster than similar investments outside the shelter of a qualified tax plan.