401(k) plan

A 401 (k) plan is a kind of savings mechanism that is usually supported or sponsored by employers in the United States of America.

A 410 (k) functions to help employees prepare for retirement by setting aside funds. Under this system, income taxes on the money that has been saved may be suspended, depending on the type of 401 (k) plan the employee has availed of.

Under a 401 (k) plan, an employee may choose to have a certain percentage or amount taken from his salary, to be directed as a contribution to his 401 (k) account. The money from contributions is invested in various types of funds. Usually, these contributions are made on a pre-tax basis. There is, however, a maximum amount set for pre-tax contributions.

Another type of 401 (k) plan, which is known as the Roth 401 (k), allows the plan holder to direct his contributions, either partially or completely, to a Roth account. Under this arrangement, income tax is paid for the saved money in the same year as the contribution is made.

Holders of 401 (k) plan often choose a participant-directed plan. Under this option, the holder has the ability to choose among different investments, such as stocks, bonds, or various mutual funds in which his money will be invested.

In many cases, employees are also allowed to take out loans from their 401(k). Payment of such loans is subject to interest at pre-determined rates. The usual maximum term for loans taken out from a 401 (k) is five years.