A
401k is an employer sponsored retirement plan. In the united
States, 401(k) plans are the most popular
form of retirement plan.
To encourage American workers to save for their own
retirement, 401(k) plans were created by Congress. From the Internal Revenue
Code section that creates the tax savings, the term "401(k) plan" was
coined.
An
employee saves for retirement on a pre-tax basis with a 401(k) plan; this is the
reason for why a 401(k) plan is sometimes referred to as a deferred
compensation plan. Taxes are deferred until the employee withdraws the money at
retirement, usually when the employee is in a lower tax bracket.
The benefits that are provided by the 401 (k) plans to its
employees are the reason for its popularity. The main benefit is the pre-tax
savings, which increases take home pay. Until you retire when you will probably
be in a lower tax bracket, you can delay tax on income earned today.
Who Provides 401k Plan?
An employer, typically a private sector corporation, must pay
for 401(k) plans but self employed individuals can set them up also, and
previously government entities could too.
In addition to selecting and monitoring plan investment, the
employer acts as a plan fiduciary and is responsible for creating and designing
the plan.
Actually, to one or more financial services companies, such as a
bank, mutual fund, third party administrator, or insurance company; nearly all
employers outsource all of this work.
The employee elects to have a portion of his or her salary
paid directly, or "deferred", into their 401(k) account. The employer
appoints trustees who decide how the plan's assets will be invested in
trustee-directed 401(k) plans.
The employee can choose from a number of investment options,
usually an assortment of mutual funds that lay emphasis on stocks, bonds, money
market investments, or some mix of the above in participant-directed plans (the
most common option).
The option to purchase the company's stock is also offered
by 401(k) plans of many companies. At any time, the employee can generally
re-allocate money among these investment choices.
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