401(k) Plans

Perhaps the most popular retirement plan being elected today, a 401(k) retirement plan is a type of plan to which the employee can contribute from his or her paycheck before or after taxes are taken out. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions, matching the employee’s contributions up to a certain percentage.

There are two types of 401(k) plans. In a traditional 401(k) plan, employees are allowed to make contributions from their paychecks on a pre-tax basis. Thus, employees can avoid paying taxes on this income until it is distributed from the account at retirement. The contributions also grow tax-free until distribution. In a Roth 401(k) plan, employees are allowed to make contributions from their paychecks on a post-tax basis (i.e., after taxes are taken out). Roth 401(k) contributions and investment assets grow tax-free, and because the employee paid taxes on the contributions up front as ordinary income, distributions at retirement are generally tax-free.

Participation Rules