A 401(k) is a retirement account offered through your job. You choose a percentage of each paycheck to contribute, your employer moves it into the account before you ever see it, and you invest it in the funds the plan offers. Many employers add a matching contribution on top.
The tax advantage is the point. In a traditional 401(k), contributions come out before income tax, so a $1,000 contribution lowers taxable income by $1,000 and the money grows untaxed until you withdraw it in retirement. In a Roth 401(k), contributions are taxed now and withdrawals in retirement are tax-free. Either way, no tax is due on dividends or gains along the way.
For 2026, you can contribute up to $24,500 of your own pay, plus $8,000 more if you are 50 or older ($11,250 at ages 60 to 63). Employer contributions do not count against that figure but do count toward the overall 415(c) cap of $72,000.
Money is meant to stay until 59½; earlier withdrawals generally owe income tax plus a 10% penalty, with some exceptions. When you leave a job, you can leave the account, roll it to a new employer's plan, or roll it to an IRA.
The common mistake is contributing less than the full employer match, which leaves free money on the table, or setting a percentage once and never raising it after a raise. A second one is spreading contributions unevenly so that the limit is hit in October and the match stops early, if the plan does not true up.