This is employer sponsored retirement plan where before tax money is contributed i.e. contribution is tax deductible. Typically money is cut from your paycheck. You can select the type of investment from assorted choice of mutual funds, stocks, bonds etc offered by your employer.
Real gem here is some employers match the contribution up to certain limit. This is free money which one must not loose!
- Tax is not eliminated, but it is deferred till retirement.
- At retirement you are expected to have low income tax bracket.
- Limited choice for investment (by your employer) compared to Roth IRA or Traditional IRA.
- For 2007, typical maximum contribution limit is $15500.
- Most of the
cases similar rules applies as Traditional IRA
except contribution limit and eligibility.
- Always contribute minimum upto employer 401k match.
- Typically it is better to convert 401k from previous employers to Rollover IRA as you get to choose the broker and far better choices for investment.
Official and detail information about 401k can be found here.