401(k) and 403(b) plans, explained

A 401(k) (or a 403(b) at many non-profits and schools) lets you save for retirement straight from your paycheck, with tax advantages.

How it works

• You choose a percentage of each paycheck to contribute
• Traditional contributions lower your taxable income now; you pay tax when you withdraw
• Many plans offer a Roth option: no tax break now, but qualified withdrawals are tax-free
• You pick from the plan's list of investments
• There's a yearly contribution limit set by the IRS, higher for people 50 and over

Good to know

• Withdrawals before age 59 and a half are usually taxed and penalized, with some exceptions
• Loans from a 401(k) are possible in many plans but come with risks if you leave your job
• Check the fees on the investments you choose

General education only. Limits and rules change; check IRS.gov and your plan documents. Nickel Gains isn't paid by any broker, fund company or adviser.