ELI5: 401k

Imagine your parents get paid every week. Part of that money is used to buy toys, food, and other things you need right now. But what about when you're old, like grandma and grandpa, and can't work anymore? How will you get money then?

That's where a 401(k) comes in. It's like a special piggy bank just for when you're old and retired.

Here's how it works:

• Every time your parents get paid, a little bit of their money goes into this special piggy bank before they even see it! Think of it as saving a small portion of your allowance before you can spend it.
• This money in the piggy bank is used to buy tiny pieces of big companies, like Apple or Disney. This is called investing.
• Over many, many years, these tiny pieces of companies hopefully grow in value. This means your piggy bank gets bigger and bigger!
• Sometimes, your parents' boss (the company they work for) will also put money into the piggy bank! It's like getting free money! This is often called a company match.
• When your parents are old enough to retire, they can start taking money out of the 401(k) piggy bank to live on. They will need to pay some taxes (a bit of money given to the government) when they take the money out.