401k is an investment and retirement account sponsored by your employer. You might have also seen a 403b investment and retirement account. 403b accounts are offered by non profit companies or government, while 401k accounts are offered by for-profit companies. They essentially function the same way.

There are tax advantages to using the 401k instead of a brokerage account. Employees can contribute before tax dollars to see some immediate tax relief. If the employee contributes $1000 to his or her 401k, then that $1000 will not be taxed as income. That means your taxable income goes down by $1000! This will result in hundreds or even thousands of dollars in tax savings. In addition, some employers may offer employees the option to contribute after tax dollars to the account and have tax-free gain.

To sweeten the reason to contribute to your 401k, some employers offer to match your contributions. For example, my old work place used to match dollar for dollar of my contribution up to 3% of my annual income. That means if I contribute 3% of my annual income to my 401k, my employer will also contribute 3%. If your benefits include 401k contribution matches, you should definitely contribute to at least up to the match!

You can contribute up to $22,500 for 2023 to your 401k account. (This amount does not include your employer match. If you include the employer contributions, your total contribution for the year cannot exceed $66,000.) If you are age 50 or older, you are eligible for an additional catch contribution which increases the maximum amount to $30,000 (Your total contribution including employer contribution cannot exceed $73,500).

The 401k is a great retirement vehicle to use, because your contributed amount is deducted from your paycheck. You won't receive the money in the first place, so the pain of parting with the money is not as high.

As with the other retirement vehicles, I will list the pros and cons of having this retirement account.

As stated earlier, I would recommend at least contributing up to your employer contribution match. Additional amount can be saved on top of that depending on your current financial situation. I have read articles where they recommend saving about 10 to 15% of your annual income. For myself, I contribute just enough to reach the annual contribution limit on my last pay check. I contribute the maximum, because currently my annual expenses are low as I do not have a family yet. I expect in the future when I am married and have kids, my annual expenses would go up and I would not have as much money to contribute to my retirement account.