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401(k)
What is a 401(k) plan?
A 401(k) plan is a type of qualified
retirement plan. Qualified retirement plans are savings
plans that receive special tax treatment in exchange for
meeting
numerous requirements spelled out in the Internal Revenue
Code. Qualified plans are also subject to ERISA (Employee
Retirement Income Security Act of 1974) and the regulations
adopted by the Department of Labor under that law.
Who uses 401(k) plans?
A 401(k) plan is provided by an
employer, who becomes the plan sponsor. An employee
who is enrolled
in a 401(k) is called a plan participant. 401(k) plans
are used by businesses of all sizes, from small, unincorporated
companies to large multinational corporations. They are
established
for many different reasons and have become quite common
as an added benefit for both employers and employees.
401(k)
plans are also appropriate for employers who want to
offer a retirement plan to their employees and at the same
time,
allow employees to share the responsibility of funding
the plan.
Why do employers use 401(k) plans?
One of the main reasons
employers elect to establish retirement plans is the
tax benefits offered by these plans. Employers are allowed
a current federal tax deduction for contributions made
to a
qualified plan. Plan participants pay no current federal
income tax on amounts contributed on their behalf until
they begin withdrawals. Lump-sum distributions may be
eligible
for favorable tax treatment, such as ten-year forward
averaging. Participant contributions made to the plan
accumulate income
and capital gains, tax-deferred. Tax deferral means that
a participant pays no income tax on the interest, dividends,
or capital gains earned by the plan until they're withdrawn.
These benefits are enjoyed by all qualified retirement
plans,
including 401(k) plans. The 401(k) plan offers the additional
advantage of allowing participants to reduce the amount
of their incomes subject to current federal income tax
by the
amount deferred to the plan. The ability to reduce their
taxable income by participating in salary deferrals can
save employees substantial amounts in income taxes each
year.
There are also important non-tax reasons to establish
a 401(k) plan. Employees have come to view employer-sponsored
retirement
plans, and 401(k) plans in particular, as a requisite
job
benefit. This perception allows employers to use the
401(k) plan as an effective means of attracting employees
and
minimizing turnover. Productivity gains may also be possible
in plans
that tie employer contributions to profitability. Contact
us to find out more about the 401(k). Our registered
representatives are here to help you identify and achieve
your financial goals.
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