408(k) Plan

A 408(k) plan is an employer-maintained retirement plan, often referred to as a Simplified Employee Pension (SEP). "408(k)" actually refers to the part of the Internal Revenue Code that provides for SEP. In a 408(k) plan, the employer and the employee both contribute to a retirement account, though the employee is the actual owner of the account. This makes the 408(k) plan similar to a 401(k), but the 408(k) plan is actually a little simpler. It is only available to companies with under 25 employees - including the self-employed - and allows employees to contribute to their 408(k) plan with pre-tax dollars. A 408(k) plan does have annual contribution limits, but the employee pays no taxes on the employer's contributions. The contributions on all earnings in the 408(k) plan are tax-deferred until withdrawn.