401(k) plan

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A retirement investment plan in which a contributor defers taxation on contributions until after withdrawal. Under a traditional 401(k), a worker places a portion of his/her pre-tax income into a 401(k) account and allows it to be invested. Taxation is deferred until withdrawal from the account, generally after retirement. Withdrawals prior to the age of 59 1/2 are subject to excise taxes, but the investor must begin disbursements before the age of 70 1/2, unless he/she is still employed with the company offering the 401(k). Most employees are allowed to place up to $16,500 (in 2009) into a 401(k), and some employers have matching contributions.

In 2006, the U.S. Government instituted the Roth 401(k), which allows post-tax contributions in return for tax-free withdrawals after retirement. This gave retirement investors a wider range of choice based upon their specific needs.

Most 401(k)s are employee benefits and workers must have a sponsoring employer to take advantage of one. However, a self-employed person may also set up a 401(k) for himself/herself.

401(k) plan