Internal Revenue Code Section 401(k)
The 401(k) plan is now the the most popular retirement savings plan in the United States of America.
The growth of 401(k) plans is directly attributable to a shift away from traditional defined benefit pension plans, where employers are responsible for providing retirement benefits to their employees, to 401(k) and other defined contribution plans, where participants share in the responsibility for saving and investing for their retirement.
401(k) plans can be a powerful tool for employees, as well as business owners, to save for retirement.
Employers establish 401(k) plans for a variety of reasons:
- A well designed 401(k) plan can help attract and retain talented employees
- It allows participants to decide how much to contribute to their accounts on a before tax basis
- Employers receive a tax deduction for their contributions to employees’ accounts
- Contributions and earnings generally are not taxed until they are distributed at retirement
- 401(k) plans can be designed to provide contributions favoring the business owners and their key employees
- Participants can borrow from the plan, which is an advantage over the SEP IRA and SIMPLE IRA plans
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