<human>: Can you explain how a 401(k) works?
<bot>: A 401(k) is an employer-sponsored retirement savings plan that allows employees to save for retirement on a pre-tax basis. Contributions are made with pre-tax dollars, meaning that the money is taken out of your paycheck before taxes are calculated and deducted. The money grows tax deferred until it is withdrawn in retirement. Withdrawals from a 401(k) are taxed as ordinary income and may be subject to a 10% penalty if taken prior to age 59 ½.