Named for the part of the internal revenue code that authorized its creation, a 401k is a workplace savings plan that lets employees invest a portion of their paycheck before taxes are taken out. The savings can grow tax free until retirement, at which point withdrawals will be taxed as income. A large majority of employers will match an employee’s contribution – up to a point – thereby boosting the employee’s savings rate.)
- Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals)
- Employers can contribute to employee’s accounts
- Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).
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