A 401 (k) plan is a retirement savings plan offered by many American employers that has tax advantages for the saver. It is named after a section of the U.S. Internal Revenue Code (IRC). The employee who signs up for a 401 (k) agrees to have a percentage of each paycheck paid directly into an investment account.
What is a 401(k) & how does it work?
A 401 (k) is a defined-contribution retirement savings plan offered by many employers that comes with tax advantages. You pay into your 401 (k) while you are working by adding a percentage of each paycheck into the account.
Are 401(k) plans defined contributions?
They may be either defined contributions or defined benefits, such as a pension plan. The 401 (k) plan is a defined contribution plan. That means the available balance in the account is determined by the contributions made to the plan and the performance of the investments. The employee must make contributions to it.
Are 401(k) contributions tax-free?
A workplace 401 (k) plan helps you save a substantial amount each year for retirement, but there are annual limits on contributions by you and your employer. Whether you choose a traditional 401 (k) for the upfront tax break or a Roth 401 (k) for tax-free income in retirement (or both), the contribution limits are the same.
