401 (k)s

Home » Tax Center » Tax Tips » 401 (k)s

401 (k)s

A 401(k) plan is an employer sponsored plan that lets you contribute a percentage of your salary to a trust account, putting off any taxes on that money until you withdraw it, usually after age 59-1/2. Companies often match some of your contribution, and any taxes on those matching funds are also deferred, as long as the total going into the account does not exceed the limit for the year. As with IRAs, the earnings in the account grow, tax free, until you withdraw the money, and if you expect your tax rate to drop after your retirement, because you have less income, your savings could amount to an even bigger nest egg.

Through automatic payroll deductions, you can usually contribute between 1% and 25% of your eligible pay on a pre-tax basis, up to the annual IRS dollar limit of $15,500 ($25,000 if you're age 50 or older). In this case, you are making salary-reduction contributions that reduce your take home pay, but also your income tax basis, a significant tax break vs. “after tax” investments.

There are typically IRS penalties associated with early withdrawal of 401(k) assets, but many plans allow you to borrow against your assets. If you leave an employer, you may be able to keep your plan with the employer, or "roll it over" into an IRA, avoiding these penalties. Consult your plan administrator for details.

News and Events

Tax Center