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In the United States, a 401(k) or 401k retirement savings plan allows a worker to save for retirement, and have the savings invested while deferring current income taxes on the saved money and earnings until withdrawal. This type of plan is also known as a "traditional" 401(k).
401(k) plans are mainly employer-sponsored: employees elect to have a portion of their wages paid directly into their individual 401(k) account, which is managed by the employer. Such payments are known as "contributions".
Since 2006, another type of 401(k) plan is available. Participants in 401(k) plans that have the proper amendments can allocate some or all of their contributions to a separately-designated Roth account, commonly known as a Roth 401(k). These "Roth" contributions will be collected and treated as after-tax dollars; that is, income tax is paid or withheld in the year contributed. Qualified distributions from a designated Roth 401(k) account, including all income, are tax-free. (A traditional 401(k) account is funded with pre-tax dollars and, in general, tax must be paid when the original contribution and earnings are withdrawn.)
As a benefit to the employee, the employer can optionally choose to "match" part or sometimes all of the employee's contribution by depositing additional amounts in the employee's 401(k) account or simply offering a profit-sharing contribution to the plan. All employer matching funds are deposited into the account on a pretax basis, even if the employee's contributions are all Roth contributions. Employer contributions may be subject to vesting rules set by the plan documents requiring the employee to reach a certain number of years of service before they are entitled to keep the matching funds.
In participant-directed plans (the most common option), the employee can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above. Many companies' 401(k) plans also offer the option to purchase the company's stock. The employee can generally re-allocate money among these investment choices at any time. In the less common trustee-directed 401(k) plans, the employer appoints trustees who decide how the plan's assets will be invested.
The title of this article "401(k)" references 26 U.S.C. § 401(k), a section of the Internal Revenue Code. The corresponding plan and section for non-profit organizations is 403(b) (26 U.S.C. § 403(b)). For government entities, the equivalent is a 457 plan, currently under 457(b) (26 U.S.C. § 457) although older plans were established under 457(g).
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