A 401(k) is a retirement account that you don’t have to pay taxes on right away (the technical term is “tax-deferred”). These accounts are generally sponsored by employers, who can use them as a substitute for a traditional pension plan. Unlike a pension plan, which is managed and paid for entirely by the employer, a 401(k) acts as a personal retirement plan. Employees can contribute up to 15% of their salary every year (but no more than $11,000 a year for people under 50, and $12,00 for people over 50), which will not be taxed until they withdraw the money.

The interest, investment earnings and employer contributions (the employer can decide to pitch in to the account, if they want) are also not taxed until the employee withdraws the money. If the money is withdrawn before retirement age (currently 59.5 years old), the account holder faces an early withdrawal penalty fee.

Tags: 401k, retirement, saving