401(k) Plan

401(k) plan

See salary reduction plan.

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401(k) Plan

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 by the company offering the 401(k). Most employees are allowed to place up to $16,500 (as of 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 choices based on 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.

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401(k) Plan

What Does 401(k)Plan Mean?

A qualified plan established by employers by which eligible employees can make salary deferral (salary reduction) contributions on a posttax and/or pretax basis. Employers may make matching or nonelective contributions to the plan on behalf of eligible employees and also may add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

Investopedia explains 401(k)Plan

Contributions in 401(k) plans usually are capped by the plan and/or IRS regulations limiting the percentage of salary deferral contributions by employees. There are also restrictions set on employee withdrawals; penalties may apply if an employee makes a withdrawal before reaching retirement age as defined by the plan. Plans that allow participants to manage their own investments often provide a group of investments from which employees can choose. Otherwise, investment professionals hired by the employer direct and manage the employees' investments.

Related Terms:
• 403(b) Plan
• Roth IRA
• Traditional IRA
• Qualified Retirement Plan
• Tax Deferred