A 401(k) plan is one type of tax-deferred defined contribution pension plan that many companies offer to their workers. In a DC plan, the employer specifies how much the employee and/or the employer may contribute to the individual's account each year.

Employers do not guarantee a specific monthly payment in retirement, like they do in a traditional, defined benefit pension plan.

Employees usually get to choose how those contributions will be invested. How much they have in retirement depends on how much they save and how well - or badly -- their investments fare. When employees leave the company, they get to keep their 401(k) contributions, plus employer contributions that are vested, plus accumulated earnings.

Employees have no income tax withheld on salary they put into a 401(k) account, but they do owe Social Security and Medicare tax on their contributions. Investment earnings are not taxed as long as they stay in the account. However, every dollar that is taken out is taxed as ordinary income. Withdrawals before age 59.5 may be subject to an additional 10 percent penalty.

Similar plans include 403(b) plans, offered by many educational and non-profit employers; and 457 plans offered by government employers.

See http://www.irs.gov/taxtopics/tc424.html