A 401K is a workplace savings plan that lets employees invest a portion of their paycheck before taxes are taken out. The savings can grow tax free until retirement, at which point withdrawals will be taxed as ordinary income. A large majority of employers will match an employee’s contribution – up to a point – thereby boosting the employee’s savings rate.
While having a 401K program creates an attractive benefit to potential employees and improves employee retention, it also can provide a tax savings. Because overall employees’ taxable income is reduced with pre-tax 401K contributions, overall employer payroll taxes may be reduced significantly.