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Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.

401(k), Roth 401(k) Or Just 401k Plan

Definition:

Mr. Roth was a very smart man. He realized that Social Security alone was not going to cut it so that workers en masse could retire with dignity. He wanted to shift the onus of that financial burden onto the employees themselves with some help/love from the corporations for whom they were working.

In 1978, the Roth 401k plan was created. Specifically, the 401k plan is "qualified" meaning that you don’t automatically get it just for showing up. A bunch of hurdles you and your company have to jump through to properly structure the beast. The 401k is also a "defined contribution plan", meaning that the money the employee puts in and money that the employer puts in are defined – not open ended. This concept stands opposite "defined benefit plan" wherein the company is on the hook for investment return minimums rather than sharing that risk with the employee.

The basic idea here is that a 401k is a great deal for the employee because for every buck she saves, her employer may give her another buck – tax deferred – until she retires (and then taxed like a screaming IRS banshee). Like a twofer on your investing dollar before you even start investing the dough.

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