A 401(k) is an employer-sponsored retirement plan that lets you defer taxes until you're retired.
In addition, many employers will match a portion of your contributions, so participation in your employer's 401(k) is like giving yourself a raise and a tax break at the same time.
This first calculator shows how your balance grows during your working years:
During retirement, you pay income tax on the money you withdraw each year:
401k Tax Advantage
The tax advantage of the 401(k) is similar to that of a deductible IRA - it's not so much that you get to defer taxes,
as that you pay less taxes, period.
Unlike a regularly-taxed account, the 401(k) lets you get taxed just once, rather than multiple times.
|You pay income tax, and then make your contribution with post-tax dollars
||You get a tax deduction, essentially letting you deposit pre-tax dollars
|Your principal may be subject to taxes on dividends and capital gains as it grows
||Your principal grows tax-free
|You pay capital gains tax on your gain at withdrawal
||You pay income tax on the entire amount of your withdrawal
Roth vs. Regular 401k
A Roth 401(k) gives you a similar "tax me once" advantage, except that you get taxed at the beginning rather than the end.
See the Roth IRA article for more.
For More Information
This IRS 401(k) document gives a brief overview with links to other documents on their site.
The Bogleheads have prepared this article covering 401(k)'s in detail.
If you're an employee, your best source of information is from your employer, who can explain the choices available under your plan.
If you're an employer planning to start a 401(k) for your employees, consider a provider of
low fee index funds.