Tips to help you understand a 401(k) and get the most out of this investment strategy. If you have been thinking of saving for retirement, you may have heard that starting a 401(k) is one of the best ways to do this. You may be wondering how a 401(k) works, and how it can help you save money effectively. What is a 401(k)? A 401(k) is an investment means provided to employees ofmedium and largesized businesses. Typically, a 401(k) plan offers a variety of investments, ranging from low to high risk. Low risk options may include bonds and treasury notes, while higher risk options may include small cap businesses and foreign investments. Employers typically appoint a plan administrator to helpempoyees make changes, choose investment strategies, and maximize their savings. What are the advantages of a 401(k)? There are several advantages of starting a 401(k). First, the money you invest is pre-tax, meaning that it is taken out of your pay before any taxes are calculated. This allows you to invest more money each pay period, while minimizing the impact of your investments on your take home pay. Second, many employers "match" a certain percentage of your investments. For example, if you invest four percent of your gross pay, your employer may contribute an additional four percent. Finally, a 401(k) plan allows you to manage your own investments - you are free to change your investment strategy at any time. Are there any disadvantages to a 401(k)? One disadvantage of a 401(k) is that there are limits on the amount you can contribute each year. This amount is revised yearly - for 2009, the limit is $16,500. Another disadvantage is that you cannot take the money out until you turn 53 without incurring taxes and stiff penalties; however, you can usually take out a loan on your 401(k) balance without paying taxes, as long as the money is repaid.