A 401k is a retirement set up by an employer for employees. A 401k retirement plan is the most
common type of retirement plans. 401k plans have many rules that both for the employer and the employee have to
follow. In the same way as a traditional IRA, a 401k plan allows the assets to grow tax deferred. The employee
is not taxed on his/her 401k assets until withdrawal.
A 401k retirement plan has limits for
both the employer contributing on behalf of an employee as well as for the employee to contribute
to his/her own 401k. The 401k limit is outlined in the Internal
Revenue Code Section 401(k).
The 401k Limit on Contribution and Distribution
The IRC code sets the maximum 401k contribution
amount, called the 401k contribution limit. 401k withdrawals can be made according to the rules of each 401k plan. However, if a
401k plan participant makes a withdrawal from his/her 401k before retirement age, there could be tax consequences
and penalties, see 401k early withdrawal.
401k plan for small businesses and business owners
Most people think that a 401k is for big businesses. However, small businesses can also set
up a 401k retirement plan for thier employees. Sometimes you don't even
need to have employees to set up a 401k. A business owner wanting flexibilities that a 401k plan gives can set up
his/her own individual 401k or a solo 401k.