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401K Plan

401(k) Plan


The most common type of defined contribution retirement plan, in which employees choose to defer part of their compensation. Under the typical 401(k), employees contribute anywhere from 1 percent to 15 percent of their pre-tax annual salary each year to the plan. In addition to this amount, many employers will match the employee's contribution, such as 50 percent of up to 6 percent of the employee's contribution. For example, if an employee contributes 6 percent of his or her salary to the 401(k) plan, the employer will contribute an additional 3 percent so that the employee will have saved a total of 9 percent of his or her annual salary (i.e., 6 percent contribution, plus 3 percent employer match). There are annual maximum amounts that employees can contribute as well as distribution restrictions prior to age 59.5.

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