A 401k is a retirement plan set up by an employer that allows employees to deposit a portion of their pre-tax earnings into a savings account that earns tax-deferred interest. The money and interest is not taxed until you withdraw the money at age 65.
The Tax Reform Act of 1978 is what brought the idea of 401k accounts into light, but the first 401k was not actually set up until 1982. Since then it has undergone a few revisions, and it 1991, the final regulations were finally reached and published, explains Carlos Hank Rhon.
With a 401k, you get to choose the amount you want put into the account and sometimes the employer will match that amount. The IRS limits the amount of money that a person can invest into their 401k to $16,500 (in 2011). The money comes out of your gross earnings and does not get taxed until you withdraw it.

Advantages of 401k’s are:
Free money from the employer
Lower taxes
Allowing individuals to save without having to remember to make a deposit into their savings account
Having enough money to live on after retirement
If you need help figuring out how to get started, talk to a bank who can help you with your personal and business needs with regard to investing. When a person is just starting out in the work force, saving for retirement is the farthest thing from their minds. They general attitude is “I’ve got plenty of time to save for retirement”. But, the difference of starting to save at age 25 and age 35 can mean the difference between five hundred thousand and a million dollars or more, depending on your salary of course.