A 401(k) plan is an employer-sponsored defined contribution retirement plan that allows employees to defer a portion of their salary on a pre-tax (traditional) or after-tax (Roth) basis.
2025 contribution limits: - Employee elective deferrals: $23,500 (under 50). - Catch-up contribution (age 50–59, 64+): +$7,500 = $31,000 total. - Super catch-up (age 60–63, SECURE 2.0): +$11,250 = $34,750 total. - Total contributions (employer + employee): $70,000 (or 100% of compensation if less).
Traditional vs. Roth 401(k): - Traditional: Pre-tax contributions → tax-deferred growth → taxed on withdrawal. - Roth 401(k): After-tax contributions → tax-free growth → tax-free qualified withdrawal.
Employer match: Employers may match employee contributions (often 50–100% of first 3–6% of salary). Matches are always pre-tax regardless of the employee's election.
Vesting: Employer contributions may be subject to a vesting schedule (cliff or graded).
RMDs: Required beginning April 1 after age 73 (traditional); Roth 401(k) RMDs eliminated by SECURE 2.0.
Loans: Many 401(k) plans allow loans — up to 50% of vested balance or $50,000 (whichever is less).
Hardship withdrawals: Available for immediate and heavy financial need; subject to income tax + 10% penalty.
> Exam tip: Know the contribution limits (especially the employee deferral limit vs. total limit), vesting rules, and 10% penalty for pre-59½ distributions. 401(k) questions appear heavily on CFP®, Series 65, and EA Part 2.