401k Plans

What is a 401k plan?

In 1978, section 401k of the Internal Revenue Code authorized the use of a new type of defined contribution plan that allows for the employee to make pre-tax contributions to the plan.

How It Works

Employee 401k contributions are automatically deducted from their paycheck each pay period. This money is taken out before the employee’s paycheck is taxed. The contributions are invested at the employee’s direction into one or more funds provided in the plan. Employers often "match" employee contributions, but are not required to do so. While the investments grow in the employees 401k account, they do not pay any taxes on it.

Advantages and Benefits

401k plans offer many benefits including the following:

401k plans have proven to be popular with employees for several reasons. The tax deferral is obviously high on this list of reasons. Others include the increased portability of this plan, employer matching contributions, and the increased control associated with self-direction of investments.