401k

Named after a section of the 1978 Internal Revenue Code, a 401(k) is a type of defined contribution pension plan. It is a device to provide tax advantages on money set aside for retirement.

An employer must co-operate in setting up such a plan for his employees, because he is responsible for reporting salaries to the Internal Revenue Service. The employee asks to have part of his salary paid directly into the 401(k) fund, which can be invested as he chooses. The contribution to the account is not taxed as income and the ultimate profits on investments are not taxed until the employee starts to withdraw funds at retirement.

The plan has proved popular because it has more flexibility than Individual Retirement Accounts, known as IRAs. There is no fixed limit to the total yearly contribution to a 401(k) and the terms for early withdrawal are less restricted.

There are other forms of defined contribution plan, such as the 403(b) and the 457.

At present, there are a number of financial-advice sites on the Internet which describe these plans in their free-content sections.