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401k Plans Definition The 401k plan is a retirement plan available to employees in the United States. The main advantage of the 401k is that it allows you to save for your retirement while deferring income taxes on the money you save as well as the earnings of that money until you retire later in life. The 401k plan is an employer-sponsored retirement savings plan and, therefore, must be set up by an employer for their employees. This is different from an IRA which is an individual retirement account set up by the individual. Often 401k's have several investment options including mutual funds, stocks, and money market funds. In a 401k, the employee elects to have a percentage of their salary put directly into a 401k account set up by the employer. They usually have a set selection of investments that they can distribute the money funds into. Some companies match employee contributions into the 401k. This varies widely among employers, but often is a 25% to 100% matching up to a certain point, usually in the range of 6% of the employees overall salary. In the case where an employee is no longer with the company that set up the 401k, the employee usually can keep the 401k active for the rest of their lives. There are some tax implications and maximum contributions around 401k accounts depending on the income of the employee and the age of the employee. These laws are always changing, so it's a good idea to check with the IRS or your accountant as to how to handle 401k and IRA distributions and contributions.
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