401(k) Plans

Definition: A 401(k) plan is a qualified defined contribution plan offered by employers. It allows employees to have a certain percentage of their salary deducted and invested in the plan. The deduction is pre-tax, so current income tax is reduced. The plan usually has a number of mutual funds where the employee can designate his deduction be applied. In some cases, the employer may match a portion of the employee’s contribution. The deposits and earnings are tax deferred until withdrawn in retirement.