401K
401(k) Plan is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. 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 such as matching the employee’s contributions up to a certain percentage. SIMPLE and safe harbor 401(k) plans have mandatory employer contributions. (1)
Many employers help employees save for retirement by offering a retirement plan that allows them to set aside a portion of each paycheck for retirement. But depending on the type of employer you work for, you may be saving in a 401(k) plan, a 403(b) plan (also called a tax-sheltered annuity), or a Governmental 457(b) plan (also called a deferred compensation plan).
Each of these savings arrangements is designed to help you fund your retirement and enjoy tax benefits for doing so. All of these plans also include these great features:
- Your contributions are made through payroll deduction—a convenient way to save.
- Your taxable income is reduced because contributions are deducted from your paycheck on a pre-tax basis.
- You won’t pay tax on any investment earnings until you take money out of the plan.
- A plan may allow you to make Roth contributions, which come out of your paycheck after taxes have been withheld. In exchange, you can generally take these savings and their investment earnings out of the retirement plan tax-free in retirement.
- You can take your savings with you if you change jobs or retire.
- Your ultimate retirement benefit from these types of plans depends on the amount you and your employer contribute, and any investment gains or losses within your account.
Caps placed by the plan and/or IRS regulations usually limit the percentage of salary deferral contributions. There are also restrictions on how and when employees can withdraw these assets, and penalties may apply if the amount is withdrawn while an employee is under the retirement age as defined by the plan.
Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty.
References
IRS. Retirement Plans. https://www.irs.gov/retirement-plans/plan-participant-employee/definitions
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