A 401k plan is a type of retirement savings plan sponsored by an employer, which allows employees to contribute a portion of their salary on a pretax basis.
Contributions to a 401k plan reduce taxable income for the year in which they are made, as they are made before taxes are withheld.
Earnings on investments in a 401k plan grow tax-deferred until withdrawn, typically in retirement, when they are taxed as ordinary income.
Unlike traditional IRAs, there are no income restrictions for contributing to a 401k plan.
Employers may also make matching contributions to employee 401k accounts, which are essentially free money for employees.
The maximum contribution limit for a 401k plan in 2024 is $20,500, or $27,000 for those aged 50 or older.
Distributions from a 401k plan before age 59.5 may be subject to a 10% early withdrawal penalty, in addition to income taxes.
Roth 401k plans, a variation of the traditional 401k plan, allow employees to make after-tax contributions that can be withdrawn tax-free in retirement.
rollover of a 401k plan to an IRA is permitted, allowing for greater investment options and potential tax advantages.
Unlike IRAs, 401k plans are subject to Employee Retirement Income Security Act (ERISA) rules, which provide certain protections for participants.
401k plans may offer loans to participants, allowing them to borrow against their account balance under certain circumstances.
Employers may also offer different investment options for 401k plans, allowing participants to choose investment options that align with their risk tolerance and investment goals.
Contributions to a 401k plan are immediately vested, meaning they belong to the employee and cannot be taken away.
401k plans have become increasingly popular over the years, with over 55 million active 401k participants and over $6 trillion in assets as of 2023.
The flexibility of 401k plans in terms of contribution limits and investment options make them an attractive option for retirement savings.
401k plans can be structured to maximize tax benefits for both employers and employees.
401k plans can be offered in conjunction with other retirement savings options, such as pensions and IRAs.
The use of auto-enrollment in 401k plans has been shown to increase participation rates and contribute to higher retirement savings rates.
The recent delay in the implementation of the new 1099-K reporting requirement will give businesses and taxpayers more time to adjust to the new reporting threshold.
Form 1099-K is used to report payment transactions from third-party networks such as PayPal or Venmo, and is typically required to be issued if the service processed more than 200 payment transactions and the total amount of those transactions exceeded $20,000 in a calendar year.