A 401(k) plan is a retirement savings plan offered by employers to their employees as a tax-deferred investment vehicle for retirement savings. Named after a section of the U.S. Internal Revenue Code, a 401(k) plan allows employees to contribute a portion of their pre-tax income into individual investment accounts. Employers may also choose to match a percentage of their employees’ contributions as part of the benefits package.
One of the key advantages of a 401(k) plan is the tax benefits it offers. Contributions made by employees are deducted from their taxable income, reducing their current tax liability. Additionally, investment earnings within the 401(k) account grow tax-deferred until withdrawals are made during retirement, potentially allowing for significant accumulation of wealth over time.
Employees typically have a range of investment options within their 401(k) plans, such as mutual funds, stocks, bonds, and exchange-traded funds (ETFs). They can choose how to allocate their contributions among these investment options based on their risk tolerance, investment goals, and time horizon until retirement.
While 401(k) plans offer valuable retirement savings benefits, there are certain limitations and considerations to be aware of, such as contribution limits, withdrawal penalties for early distributions, and investment fees. Employers play a crucial role in educating employees about their 401(k) options, providing investment education and guidance, and facilitating plan administration to ensure compliance with regulatory requirements.
You may also be interested in learning about these terms:
401(k) Plan
Severance Package
Benefits Package
