What is a 401(k) Plan?
A 401(k) plan is a retirement plan set up by your employer to which you can contribute pre-tax income. It s typically set up with an investment company, an insurance company, or a bank trust department. Most 401(k) plans let you choose from a variety of investment vehicles, from individual stocks or mutual funds to money market accounts. 401(k) plans offer several advantages. First, your taxable income is reduced by the amount you contribute. Second, you don t pay income tax on the earnings in the account, such as interest and dividends, until you start making withdrawals – presumably at retirement. Plus, many companies match some or all of your contributions. Not participating in a 401(k) plan in that case is like saying “no, thanks” to money from your employer. Possibly the best feature of a 401(k) plan is that once it s set up, it s automatic. The contributions are taken from your paycheck come rain or shine, without you even thinking about it. Over many years, you may acquire a big
A 401(k) plan is a retirement plan in which an employee can elect to have the employer contribute part of the employee’s wages to the plan on a pretax basis. These deferred wages aren’t subject to income tax withholding at the time of deferral. The deferred wages aren’t reflected on Form 1040, as they weren’t included in taxable wages of box 1, Form W-2. However, they’re included as wages subject to social security, Medicare and federal unemployment taxes. The amount an employee can elect to defer this way is limited. Return to index . . .
Many employers sponsor a retirement savings plan for their employees. Under these plans, also commonly known as defined contribution plans, you can save money toward your retirement on a tax-deferred basis that is, you dont pay federal or state income taxes on your savings or their investment earnings until you withdraw the money at retirement. Most peoples taxable income and therefore, their tax rate is lower at retirement than during employment, so they end up paying considerably less in taxes on their savings. The most common types of employer-sponsored retirement savings plans are called 401(k), 403(b) or 457 plans so named for the Internal Revenue Service tax codes that govern them and Thrift Savings Plans. Each has a different target audience: • 401(k) plans are offered to employees of public or private for-profit companies. • 403(b) plans are offered to employees of tax-exempt or non-profit organizations, such as public schools, colleges, hospitals, libraries, philanthropic orga
