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401K Plan

401(k) Plan

Definition

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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