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|This article is a part of Wikinvest's Personal Finance section and Guide to Investing. Please contribute or edit to improve it.|
A 401(k) plan helps a working person in the US save for retirement. It is very similar to an IRA except for the fact that is administered by the employer. Personal contributions are often matched by their employer. Transactions and profits within the plan are not taxed in any way, like a Roth account.
Contributions may be claimed as a tax deduction to reduce taxes, so the savings is considered to be from pre-tax income. Cash is taxed as income on withdrawal. This is different from the Roth 401(k), where the account holder deposits after-tax income, and withdraws it tax-free. A person is allowed to have both a 401(k) and an IRA.
Most 401ks are participant-directed, which means that the employee can select from a number of investment options, such as mutual funds, bonds, and money market investments. The employee usually has the option to change allocation between these asset classes. Some 401ks allow investment changes about once a quarter, others may allow more frequent changes. In trustee-directed 401(k) plans, the employer appoints trustees who make investment decisions on behalf of all employees.
For income below $200,000, individuals can 'defer' up to $15,500 for the year 2008 and $16,500 for 2009. Individuals above 50 can contribute an additional $5,000 in 2008 and $5,500 in 2009. Total contribution, i.e. contribution by employee plus employer contribution, cannot exceed the lesser of $46,000 or the employee's annual salary in 2008.
The employee cannot withdraw from the 401k until he/she reaches the age of 59½, except under special circumstances. Withdrawals before that age are typically subject to 10% penalty (as well as income taxes). Starting at the age of 70½, employees must take minimum distributions, i.e. they are required to withdraw, from the 401k account. This applies to both regular 401(k) and Roth 401(k) accounts. This is mandatory, unless the account holder continues to work for the employer who sponsored the plan at the age of 70½. For a Roth 401(k) account, mandatory required minimum distributions do not apply if the assets are rolled over to a personal Roth IRA after separation of service.
401(k) plans are offered through an employer. By participating in this plan, an employee authorizes the employer to retain part of their salary for these plans. Most human resources departments will have details on starting such an account with the employer.
When leaving an employer, a employee can choose to leave the 401(k) with an old employer -- in many cases, employers will charge a fee for managing 401(k) plans of ex-employees. An individual can also cash out his 401(k), but this would result in a penalty of 10%. The best option is to rollover a 401(k) from one employer to the next. http://www.bestcashloans.org.uk/