What Is A 401(K)?

Answer:
A traditional 401(K) is a retirement or pension plan that

a company provides for its employees. Plans are either Defined Benefit (DB) or Defined Contribution (DC).

A DB 401(K) plan is a promised pension package an employee receives at retirement usually based upon age, amount of service and final average salary. With a DC 401(K), eligible employees contribute a defined percentage of their pre-tax salaries into an investment account that has been established by their employer. This account allows monies earned to be tax-deffered until the individual reaches retirement age. Most plans include caps and/or IRS regulations limiting the percentage of salary deferral contributions.

Businesses that offer their employees a 401(K) plan can choose to make matching or non-elective contributions to the account. Corporations may also elect to add a profit-sharing feature to their individualized plans. Restrictions do apply towards how and when employees are allowed to withdraw their accrued assets. Dependant upon the established plan, penalties may apply if funds are withdrawn while an employee is still under the specified retirement age.


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