What does a 401(k) plan generally provide for its participants?

A 401(k) plan generally allows participants to make salary-deferral contributions, which means that employees can choose to set aside a portion of their salary into the retirement account before taxes are applied. This not only reduces their taxable income for the year, but also allows the funds to grow tax-deferred until withdrawal in retirement.

The contributions can be matched by employers, providing an additional benefit for employees saving for retirement. This mechanism is fundamental to 401(k) plans, encouraging individuals to engage in more robust retirement savings. Contributions are limited by the federal government, ensuring that the benefits are balanced and accessible.

Other options do not accurately reflect the primary function of a 401(k) plan. Fixed pension contributions typically refer to defined benefit plans, not 401(k) plans. Tax-free withdrawals at retirement apply to Roth 401(k)s under specific conditions, but are not a general characteristic of all 401(k) plans. Cash bonuses from employers are separate incentives and do not directly correlate with the structure or benefits of a 401(k) plan.