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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.


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.

References in periodicals archive ?
The IRS and the Treasury Department issued final regulations containing nondiscrimination and other requirements for cash or deferred arrangements under section 401(k) and for matching and employee contributions under section 401(m) of the Internal Revenue Code (www.
New design-based safe harbor methods for meeting the nondiscrimination rules for cash or deferred arrangements (CODAs) became effective Jan.
The following specific areas are addressed: (1) cash or deferred arrangements under section 401(k) (so-called 401(k) plans), (2) the treatment of distributions from qualified plans, (3) the temporary suspension of the excise tax on excess distributions, (4) nondiscrimination requirements for qualified plans, (5) modifications to the benefit and contribution limitations under qualified plans, (6) employee stock ownership plans, and (7) other pension and employee benefit changes.
415(b), the limit on elective deferrals under qualified cash or deferred arrangements under Sec.
Since their creation under Internal Revenue Code section 401(k), cash or deferred arrangements (CODAs) have become the most popular type of retirement benefit plan for companies of all sizes.
Matching contributions to a plan for a partner's benefit are considered cash or deferred arrangement contributions under the final Treasury regulations if they directly or indirectly allow the partner to vary the amount of contributions.
The Institute's Federal Tax Committee is in the process of analyzing the ruling -- which relates to the timing of deductions for amounts contributed under cash or deferred arrangements under section 401(k) -- and TEI may submit additional substantive comments at a later date.
90-105 holds that contributions to a qualified cash or deferred arrangement within the meaning of section 401(k) or to a defined contribution plan as matching contributions within the meaning of section 401(m) are not deductible by the employer for a taxable year if those contributions are attributable to compensation earned by plan participants after the end of that taxable year; this holding applies, moreover, without regard to whether section 404(a)(6) deems the contributions to have been paid on the last day of that taxable year and without regard to whether the employer uses the cash or accrual method of accounting.
401(a)(4) and 410(b); the final regulations on cash or deferred arrangements (CODAs) and employer matching plans; recent programs instituted by the IRS National Office to restore the qualified status to certain plans that inadvertently become disqualified; and new developments in the deduction for qualified plan contributions and the taxation of qualified plan distributions.