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Chapter 1. What Is a 401(k)? > Why Do Companies Offer 401(k)s? - Pg. 4

What Is a 401(k)? 4 For What It's Worth Where did the term 401(k) come from? It comes from a section of the Internal Revenue Service tax code. Section 401, paragraph (k), says that employers can offer these things and let employees reduce their federal income taxes if they participate. But 401(k)s are much more than a section of the tax code. For most people, a 401(k) plan will be the only way they will ever be able to retire. Let's take a look at what a 401(k) actually does: · Reduces your income taxes--When you put money into a 401(k), your income is reduced, dollar for dollar. The result is that you pay less in taxes each and every paycheck. · Delays paying taxes on investments--When you make money off your investments, you pay taxes on the increase. But if your investments are inside a 401(k), you won't pay taxes on this money for a very long time (or until you take it out). · Gets matching contributions--In many cases, your employer may match the money that you contribute. Some employers match 10¢ on every dollar that you put in; others might match 50¢ or more. Whatever the amount, it's free money. Even without a match, contributing to a 401(k)