What plan allows tax-exempt investment for retirement through an employer?

A 401(k) plan is a retirement savings plan offered by employers that allows employees to save a portion of their paycheck before taxes are deducted. The contributions made to a 401(k) are tax-deferred, meaning that employees do not pay taxes on the money they contribute until they withdraw it in retirement, typically when they may be in a lower tax bracket. Additionally, employers often match contributions to a certain percentage, which can significantly enhance the retirement savings of employees.

The nature of the 401(k) plan as a tax-exempt investment for retirement is crucial, as it encourages participation and helps employees build a substantial nest egg for their future without the immediate tax burden. This contrasts with other options such as Roth IRAs, where contributions are made after taxes, or Health Savings Accounts (HSAs) which are intended primarily for healthcare expenses rather than for retirement. Defined benefit plans also differ, as they are employer-sponsored and promise a specified payout at retirement, but they do not provide the same tax treatment as a 401(k) in terms of contributions. Thus, understanding the specific benefits and tax implications of a 401(k) is key for effective retirement planning.