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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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved


You participate in a 401(k) retirement savings plan by deferring part of your salary into an account set up in your name. Any earnings in the account are federal income tax deferred.

If you change jobs, 401(k) plans are portable, which means that you can move your accumulated assets to a new employer's plan, if the plan allows transfers, or to a rollover IRA.

With a traditional 401(k), you defer pretax income, which reduces the income tax you owe in the year you made the contribution. You pay tax on all withdrawals at your regular rate.

With the newer Roth 401(k), which is offered in some but not all plans, you contribute after-tax income. Earnings accumulate tax deferred, but your withdrawals are completely tax free if your account has been open at least five years and you're at least 59 1/2.

In either type of 401(k), you can defer up to the federal cap, plus an annual catch-up contribution if you're 50 or older.

However, you may be able to contribute less than the cap if you're a highly compensated employee or if your employer limits contributions to a percentage of your salary. Your employer may match some or all of your contributions, based on the terms of the plan you participate in, but matching isn't required.

With a 401(k), you are responsible for making your own investment decisions by choosing from among investment alternatives offered by the plan. Those alternatives typically include separate accounts, mutual funds, annuities, fixed-income investments, and sometimes company stock.

You may owe an additional 10% federal tax penalty if you withdraw from a 401(k) before you reach 59 1/2. You must begin to take minimum required distributions by April 1 of the year following the year you turn 70 1/2 unless you're still working. But if you prefer, you can roll over your traditional 401(k) assets into a traditional IRA and your Roth 401(k) assets into a Roth IRA.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
Stroud also regularly advises clientson the design and drafting of equity-based and incentive compensation plans and the implementation and design of qualified and non-qualified employee benefit plans (including health and welfare plans, 401k plans, employee stock ownership plans and supplemental executive retirement plans).
Some of the benefits WIT Nonwovens offers include: competitive salary, team members can earn up to two weeks of vacation, paid life insurance, paid telemedicine benefit, eligible for health insurance coverage in the first 30 days of employment to include spouses and children, eligible for 401k with a company match within the first 30 days of employment, 12 months perfect attendance vacation bonus, weekly and monthly safety bonuses, and WPT has contributed over $65,000 to team member 401k plans since 2016.
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Reed: The main focus of the order is to allow unaffiliated small businesses to join together to offer 401k plans. In theory, this should drive down the costs and reduce administrative requirements to offer a plan.
Rowe Price (TROW) are battling class-action suits related to fund selection and oversight of their 401k plans, and they are not alone as more than 128 cases have been filed since 2016, including Charles Schwab (SCHW), M&T Bank (MTB), Morgan Stanley (MS), Neuberger Berman, and JPMorgan (JPM), Daren Fonda writes in this week's edition of Barron's.
Then, once you have an offer, ask all those questions that you held backquestions about vacation, parenting leave, 401K plans, work-life balance, room to move up in the organization.
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The deal is further sweetened by matching contributions made by the majority of employers offering 401K plans, up to a certain point.