401(k) Plan

A 401(k) plan is a deferred compensation plan used for retirement. Employers place a specified portion of an employee's wages in a 401(k) plan at the employee's request. The employee's contributions to the 401(k) plan may earn additional income through investment vehicles, including stocks, bonds, and mutual funds. Furthermore, some employers will match part of an employee's contribution to a 401(k) plan. A benefit of a 401(k) plan is that employees do not have to pay income tax on contributions to their 401(k) plan until they start receiving distributions in retirement. Employees who prematurely withdraw funds from their 401(k) plan before reaching 59 ½ years old will incur a 10% early distribution penalty, except in cases of extreme hardship such as death, disability, or medical expenses exceeding 7.5% of adjusted gross income. Employers may establish a 401(k) plan themselves or enlist the aid of a financial organization such as a bank or insurance company. Generally, assets of a 401(k) plan are held in trust and one or more trustees handle all contributions, investments, and distributions related to the plan.