401(k)

The 401(k) plan is a type of retirement plan available in the United States. Named after a section of the 1978 Internal Revenue Code, a 401(k) is an employer-sponsored qualified retirement savings plan. It allows you to save for your retirement while deferring any immediate income taxes on the money you save or their respective earnings until withdrawn. Comparable types of salary-deferral retirement plans include 403(b) plans covering workers in educational institutions, churches, public hospitals, and non-profit organizations and 401(a) and 457 plans which cover employees of state and local governments and certain tax-exempt entities.

Related Topics:
Retirement plan - United States - 1978 - Internal Revenue Code - Retirement - Income tax - 403(b) - 401(a) - 457 plan

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

401(k) plans must be sponsored by an employer, typically a private sector corporation, but self employed individuals can set them up also, and previously government entities could too. The employer acts as a plan fiduciary and is responsible for creating and designing the plan as well as selecting and monitoring plan investments. (In practice, nearly all employers outsource all of this work to one or more financial services companies, such as a bank, mutual fund, third party administrator, or insurance company.)

Related Topics:
Corporation - Fiduciary - Outsource - Third party administrator

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

The employee elects to have a portion of his or her salary paid directly, or "deferred", into their 401(k) account. In trustee-directed 401(k) plans, the employer appoints trustees who decide how the plan's assets will be invested. In participant-directed plans (the most common option), the employee can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above. Many companies' 401(k) plans also offer the option to purchase the company's stock. The employee can generally re-allocate money among these investment choices at any time.

Related Topics:
Employee - Salary - Mutual fund - Stock - Bond - Money market

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Some companies match employee contributions to some extent, paying extra money into the employee's 401(k) account as an incentive for the employee to save more money for retirement. Alternatively the employer may make profit sharing contributions into the 401(k) plan. These contributions may vest over several years as an inducement to the employee to stay with the employer.

Related Topics:
Profit sharing - Vest

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

When an employee leaves a job, the 401(k) account generally stays active for the rest of his or her life, though the accounts must begin to be drawn out beginning at age 70-1/2. In 2004 some companies started charging a fee to ex-employees who maintained their 401(k) account with that company. Alternatively, if the employee takes a new job at a company that also has a 401(k) or other eligible retirement plan, the employee can "roll over" the account into a new 401(k) account hosted by the new employer, or into an IRA.

Related Topics:
2004 - IRA

~ ~ ~ ~ ~ ~ ~ ~ ~ ~