In retirement terminology, the term 401(k) Plan refers to a United States retirement plan which meets the requirements of the Internal Revenue Code or IRCís Section 401k. This section of the IRC defines and details the qualification rules for 401(k) trusts and plans covered by the Employee Retirement Income Security Act of 1974, ERISA which stipulates that 401(k) Plan assets are protected from creditors. Such plans are set up by employers who are financially responsible for the plan, and they have a limit as to how much can be contributed.
For example, 401(k) Plans can be either a participant directed plan or a trustee directed plan. A participant directed plan allows the employee to select from a number of different investment choices within the retirement fund. A trustee directed plan is where an employer hires a trustee to oversee the investments of the fund. Taxes and earnings on 401(k) Plans are deferred until the employee takes a distribution from the plan at retirement or when they have reached the age of 59 Ĺ, whereupon the funds are taxed as regular income. As in other retirement plans, loans on the amount accumulated can be taken out by the owner and the repaid amount reverts to the 401(k) balance. The IRS assesses a 10% penalty on early withdrawals from 401(k) plans.