401(k) Plan Options
One of the most recognized retirement plans is a 401(k), but many people don’t know exactly what one is or that there are actually several different types of 401(k) programs available. To start, a 401(k) is not actually an investment. It is a tax-advantaged, employment, benefits program which carries a defined contribution from both the employer and the employee. Employees of government agencies or non-profit organizations are not eligible for 401(k) accounts, and instead might have a 403b account instead.
With an employer that offers a 401(k) plan, an employee may invest in employer-chosen plan assets, which could include stocks, mutual funds, index funds, and real estate investment trusts in the employee account. When an employee leaves an employer, there are several options for what the employee can do with their 401(k) assets. One of the most common is to rollover the funds in the 401(k) account into an IRA which allows the former employee to maintain the tax-sheltered status of the funds in the new account.
A traditional 401(k) plan is an employer-sponsored plan where employees have their choice of investment options, as stated above. The contributions and any earnings from the investments are tax-deferred, meaning the investor only pays the taxes on those contributions and earnings once the funds are withdrawn. Some employers extend a benefit of matching a portion of employee contributions, and the income taxes on those matches are also deferred until the money is withdrawn.
Several types of plans apart from the traditional 401(k) plan are the safe-harbor plan, a profit-sharing plan structure, a cash balance plan, and a Roth 401(k). Each type of plan follows specific rules about contribution amounts, withdrawals, and other features, and each offers unique benefits and different drawbacks. Read on for more information about some of the more common types.
