401(k) Plans
American employers may provide access to a 401(k) savings plan so their employees can save money for retirement in a tax-advantaged account. Some employers match employee contributions up to a certain level.
Participation in a 401(k) is optional for employees. If they choose to participate, they can elect to have a percentage of their paycheck deposited into an investment account.
Types of 401(k) Plans
Many employers allow employees to choose between a traditional 401(k) and Roth 401(k). Employer contributions can only go toward a traditional 401(k).
- Traditional 401(k) accounts are funded by pre-tax income, reducing the employee’s total tax burden. Account owners must take required minimum distributions (RMDs) after age 72, which are taxed as regular income.
- Roth 401(k) accounts are funded by after-tax income. Account owners are not required to withdraw money no matter their age, and distributions are not subject to taxes during retirement.
Consult your tax specialist, financial advisor or insurance professional to learn more about the tax advantages and implications of 401(k) retirement plans. The information on this page should not be construed as legal or financial advice and is intended for educational purposes only.
Contributing to a 401(k) Plan
The Internal Revenue Service (IRS) limits the amount of money an employee can contribute to a 401(k) plan. The IRS may periodically adjust limits to account for inflation.
Employees can choose to split their contributions if an employer provides access to a traditional 401(k) and a Roth 401(k). IRS limits apply even if their contribution is split between two types of 401(k) accounts.
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