401(k)

A 401(k) plan, named after the section of the internal revenue code that authorizes its tax treatment, is a retirement savings account that qualifies for tax deferral. 401(k) plans are typically offered by employers as benefits to employees but can also be used by the employers or sole practitioners for their own benefits.

Contributions are typically made by the employees and may be matched by employers entirely or up to a specified percentage of the employees’ salary (4% is common, for certain regulatory reasons).

Contributions to 401(k)s are tax-deductible, meaning that they are funded with pretax money. They grow tax-free but the money is taxed when distributed. Penalty free distributions can be taken starting at age 59 ½ and starting at age 70 ½, “required minimum distributions” must be taken, and these increase as the account holder gets older.

Though similar to IRAs, these devices enjoy much higher maximum contributions than many types of IRAs. They are however, subject to more regulation and greater restrictions than are typical of IRAs.