Your 401(k)
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A 401(k) plan is a special type of tax-qualified deferred compensation plan, which gets its name from the section of the US Internal Revenue Code. Under a 401(k) plan, an employee can elect to have the employer contribute a portion of his or her pre-tax wages to the plan. These deferred wages are not subject to income tax withholding at the time of deferral, though they are included as wages subject to social security, Medicare, and federal unemployment taxes. Taxes will be due upon redemption, in most cases.
There are limits to the amount that an employee may elect to defer to a 401(k) plan. (For more information, please see our section on common questions and answers to putting money into your 401(k) plan.)
Employees usually can select from a number of different investment options in the 401(k) plan. The money grows tax-deferred, meaning people don’t have to pay tax on it until they take distributions from their plan (usually after they reach retirement age of 59 ½; if employees elect to take money before age 59 ½, they may be subject to an additionally 10% tax penalty).
Distributions from a 401(k) plan may qualify for lump–sum distribution or rollover treatment, as long as they meet the respective requirements. Many 401(k) plans also allow employees to make withdrawals due to “financial hardship,” or immediate financial needs. (For more information, please see our section on common questions and answers to getting money out of your 401(k) plan.)
Source: IRS consumer website (http://www.irs.gov/taxtopics/tc424.html)
If you are located in the San Francisco Bay Area and are interested in speaking with a financial planner or have specific retirement, investment, estate or business succession planning questions, we encourage you to speak with one of our partners at Insight Wealth Strategies. You can visit their website www.Insight2Wealth.com or call them at (925) 659-0217. For more information on your 401k plan, go directly here.
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