What is a 401(k) plan?
Many employers sponsor a retirement savings plan for their employees. Under these plans, also commonly known as defined contribution plans, you can save money toward your retirement on a tax-deferred basis – that is, you don’t pay federal or state income taxes on your savings or their in investment earnings until you withdraw the money at retirement.
Most people’s taxable income – and therefore, their tax rate – is lower at retirement than during employment, so they end up paying less in taxes on their savings.
The most common types of employer-sponsored retirement savings plans are called 401(k), 403(b), or 457 plans – so named for the Internal Revenue Service tax codes that govern them – and Thrift Savings Plans. Each has a different target audience.
These plans have many features in common, although contribution limits, vesting schedules for employer-matching contributions, investment options, and other details may differ. Be sure to read the plan documents for your particular plan carefully.
For further questions about savings plans, contact BPB Associates at 770.632.2733