A 401K plan is a retirement savings plan that is funded by employee contributions and a matching contribution from the employer. Contributions are made from pre-tax salary and the funds grow tax-free until they are withdrawn. Companies, non-profit and other tax-exempt organizations can establish these plans for their employees. 401K retirement plans are named after the section of the Internal Revenue Code that prescribes the rules under which it operates. It is also known as cash or deferred arrangement (CODA) plan.

Under the 401K plans, an employer allows the employee to defer receipt of part of his or her compensation by contributing that part to his or her account. The Employee Benefits Security Administration of the U.S. Department of Labor regulates 401K plans.

Some 401K plans include a 50% matching contribution from the employer for the employee. Employers may also make contributions to an employee's account independent of the employee's contribution and these contributions may be tied to a firm's profits as part of a profit sharing plan. Some 401K plans offer individuals an opportunity to direct accounts to a variety of investment options like mutual funds, stock market or company stock.

State governments are prohibited from offering 401K plans to their employees. Private, tax-exempt employers however, are eligible to establish a 401K plan for their qualified employees.

There are numerous advantages with 401K plans from the perspective of an employee. Employees can contribute to their 401K plan with pre-tax money. This reduces the amount of tax paid out of each salary check. All contributions from the employer and any growth of capital are exempted from taxes. The employee can decide where to direct future contributions and savings, giving them control over the investments. All contributions can be moved from one company's plan to the next company's plan if an employee changes jobs. 40 K plans are very popular as a retirement plan because of the double benefit of saving money for retirement as also saving on tax liability. plan.