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401 K

What is 401(k)?

401 K is a retirement plan for employees working in the private sector; and offered in the USA by many employers. In this arrangement, there lies a feature for employees to elect to have the employer’s contribution portion of the employee salary/wage into an individual account under this plan. In this plan, the income is not taxable in income tax returns.

Legal Status

United States Law Internal Revenue Code sub-Section 401K, a plan offered to employees working in private companies namely 401K is for the employees of and/or under the United States, US agency, or its instrumentality, established by the employer

Employee Perspective

Arrangements under the 401 k are to be made in such a way that is nondiscriminatory. The proficiency of deferring income taxes to a time where an individual’s tax rate may be lower is a vital benefit of this plan. It would have been of no worth if at the time of retirement the tax rates levied, and not the time of participation portion of the income, into the plan. Moreover, the capital gains earned in 401K are not referred to as capital gains taxes.

 

Employer’s perspective

In a 401K plan, the employer’s portion contribution is deductible for the employer’s federal income tax returns, subject to the limit as prescribed in section 404 of the Internal Revenue Code (IRC). Employers have the choice to aid on behalf of employees on a matching contribution basis, or on employees’ elective deferrals, or both. In practice, the employees are not allowed to withdraw amount(s) from 401k plan arrangements up to 59.5 years of employee’s age.

Related: 401(a), 403(b)Health Savings Account (HSA), Actual Deferred Percentage (ADP)