401(k)s

401(k)

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401(k)

A 401(k) plan is named after section 401(k) in the Internal Revenue Code. With this plan, employees have the option to elect a certain tax-deferred dollar amount or percentage to be deducted from their salary and placed into the retirement fund. Employees may contribute as much to their 401(K) as they would like, so long as they stay within the annual contributions limits that are set by the IRS. As added incentive to participate, many employers offer an employer-matching contribution feature. For example, an employer may offer a company match program of 50 cents for every dollar contributed, up to 6 percent of the total salary deferment. In other words, the employer will contribute a maximum of 3 percent of the employee’s total salary. In the event the employee elects to skip participation in the 401(k), the employer does not have to contribute to the fund. Employee contributions to the 401(k) are 100 percent vested because the money that is contributed to the plan is money that the employees were originally entitled to before making contribution elections. In many cases, an employee’s entitlement to employer contributions may be subject to a vesting schedule that is determined by the employer. The longer an employee is with the company, the more vested they become in employer contributions. Funds from a 401(k) account are not available for withdrawal by the employee until he or she reaches retirement, or encounters financial hardship. If a participant wishes to withdraw from his or her 401(k) account early, he or she will be subject to a significant tax penalty of 10 percent.

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