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  Wednesday December 12, 2018

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401(K) PLANS
Learn even more about this topic with the Encyclopedia of Personal Finance™

A 401(k) plan is a retirement savings and investment plan offered by employers to their employees. Many employers like it because it costs less than a traditional pension plan; many employees like it because it can be more lucrative and gives them more control over their retirement income.

With a 401(k) plan, you can take a portion of the cash your employer would have paid you in wages, and choose instead to contribute it to a qualified tax-deferred retirement plan (in other words, one set up according to IRS rules). You contribute the funds pre-tax, so you don't have taxes withheld on the portion of your income you contribute.

As a benefit of employment, many employers will match your contribution to your 401(k) plan, anywhere from 1 to 100 percent of your contribution.

Most plans allow you to invest in many different kinds of instruments: different kinds of mutual funds for stocks and bonds, money market funds, and guaranteed investment funds that pay a pre-set interest rate. You determine what portion of your contribution goes to each fund, and many plans let you transfer money among funds.

Unlike traditional pensions, 401(k) money is portable—you take it with you even if you change jobs. But there are tax penalties for withdrawing funds before retirement. Unless you have some kind of qualifying hardship, funds you withdraw are taxed at regular income rates; plus, there is an additional tax penalty of 10 percent.

Many plans do allow the option of borrowing from your funds without taxation, as long as you pay the money back in a prescribed manner.

Employees of qualifying non-profit institutions may have a variation of this plan, called a 403(b) plan. Nonprofit employees who want to participate in a plan other than the one offered by their company can set up a 403(b)-7 account with virtually any company offering mutual funds.

Now let's look at a similar plan that individuals can set up for themselves: the IRA.


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