What is a 401(k) Plan?
Don t let the cryptic name of the plan confuse you, these plans are actually fairly easy to understand. A 401(k) is a retirement plan offered by some employers in the United States. The plan received the name from the section of Internal Revenue Code it was named after. Tax Benefits One of the largest benefits of a 401(k) plan is how contributions are made on a pre-tax basis. As an employee, you are allowed to make pre-tax contributions through salary deferral into the plan. Since these contributions are done on a pre-tax basis, you do not pay any current income tax on the money that is deferred into the plan. In addition to reducing your tax liability through contributions, the money that is saved in the plan can earn interest and continue to grow tax-deferred. You are only taxed on the money you withdraw from the plan at a later date as ordinary income. The Employer Match Some companies offer an additional benefit in these plans in the form of a company match. This means your employe
A traditional 401(k) plan is a retirement savings and investment plan offered by employers to their employees. Many employers like it because it costs less than a traditional pension plan; many employees like it because it can be more lucrative and gives them more control over their retirement income. With a 401(k) plan, you can take a portion of the cash your employer would have paid you in wages and choose instead to contribute it to a tax-qualified retirement account, set up according to rules in section 401(k) of the tax code. You contribute the funds pre-tax, so you don’t have taxes withheld on the portion of your income contributed. As a benefit of employment, many employers will match anywhere from 1 to 100 percent of your contribution to a 401(k) plan. Most plans allow you to invest in many different kinds of instruments: different kinds of stock and bond mutual funds, money market funds, and guaranteed investment funds that pay a pre-set interest rate. You determine what porti
A 401(k) plan technically is not a separate type of plan; it is a profit-sharing or stock bonus plan that contains a “qualified cash or deferred arrangement.” (CODA) Under a qualified CODA, plan participants may elect to contribute a portion of their current compensation, on a pre-tax basis, to the plan. Such contributions are commonly referred to as salary deferrals or elective contributions. Special rules apply to 401(k) plans, including nondiscrimination requirements and limits on the amount an employee can elect to contribute. Employer contributions to a 401(k) plan can be either profit sharing contributions or matching contributions. Matching contributions are made to participants who make salary deferral contributions. Employers are not required to offer a match; however, many employers provide a match because doing so makes it easier for the plan to satisfy applicable nondiscrimination rules.
A 401(k) is an account that an employee uses to save for retirement. This account allows the employee to defer current income taxes on the saved money and interest earnings until the employee withdraws the money. The employee typically has a portion of his or her paycheck put directly into the account. Most 401(k) plans are employer sponsored plans where the employer can match part or all of the worker’s contributions.
