401(k)s: Employer-Sponsored Plans
A 401(k) is a retirement savings plan offered by employers to their employees. The plan – also known as a qualified savings plan – gives employees the ability to contribute some of their earnings to a tax advantaged savings account. A 401(k) plan is an easy way for employees to save for retirement because contributions are automatically withdrawn from their paychecks and deposited into investments, selected for the plan by the employer, but picked by the employee for their account.
The 401(k) plan is named after a section of the IRS tax code — specifically subsection 401(k) — that established the framework for this type of retirement plan. If offered by an employers, it gives employees the opportunity to save, and many employers also offer to match a portion of those savings. Called an employer match – this is a benefit employees should strongly consider, as the employer contribution is basically free money, matching a percentage of what the employee saves.
Highlights: Traditional 401(k)
- Contributions deferred from an employee’s paycheck are exempt from the employee’s taxable income – designated Roth IRA deferrals
- Employers can contribute to employees’ 401(k) accounts, providing opportunity to increase retirement savings
- Contributions made to a 401(k) account can significantly lower your income taxes. Pre-Tax contributions to this type of retirement account can significantly lower your taxable income and as a result annual income taxes
- One of the key reasons employers consider offering a 401(k) plan is to attract and retain talent. A 401(k) is attractive because it enables employees to save for retirement, benefit from an employer match and potentially reduce their taxable income.
There are several types of 401(k) plans available and as an employer it’s important to understand the rules and requirements of each. Compare plan options and discuss ask questions of plan providers to determine those features most important to you and your employees.
Employees need to understand the specific features and benefits of their employer’s 401(k) plan – including automatic enrollment, employer match, and available investment types – it is important to understand your options as well as, how and when you can participate in the plan.
Rules apply to how, when and under what circumstances distributions can be made from a 401(k) account. To get more information about these requirement, click here For more information about theses requirements click here.