The Revenue Act of 1978 created new retirement options for employee benefit plans. Under section 401(k) of the Internal Revenue Code, employers may offer their employees the option of taking cash payments currently or deferring the cash until retirement. Employees may also elect to defer current income to their plans on a pre-tax basis. This simply means that an employee can invest money into a plan before the money is taxed. Employees can save thousands of dollars each year by choosing this option. Some 401(k) plans have an add-on feature, called a savings, or "thrift" plan, that also allows employees to make after-tax contributions. Profit-sharing plans, savings plans, and stock bonus plans may include provisions for 401(k)s.
Contributions to a 401(k) plan can take several forms:
- Matching contributions. These are contributions that an employer makes to an employee's plan after the employee has contributed. For example, assume the employer agrees to deposit (or match) 50 percent of the employee's first 10 percent deferral. In such an instance, if the employee deposited 10 percent, the employer would add an additional 5 percent. The total percentage deposited for the employee therefore would equal 15 percent.
- Elective contributions. These are before-tax contributions made by an employee. They are funds that the employee could have taken as a cash amount but instead deferred to the plan. They are also called elective deferrals.
- Non-elective contributions. These are funds that are automatically put into the plan by the employer. The employee is not allowed to receive them alternatively as cash.
Most 401(k) plans allow you to direct your contributions to a choice of mutual funds that invest in everything from money markets to aggressive-growth stock portfolios. If your employer offers a 401(k) plan, you owe it to yourself to investigate this popular way to build income resources for retirement.
The Retirement Consulting Group (RCG) — an experienced team of retirement consultants who understand the nuances of retirement planning — is designed to supplement the relationship you have with your financial professional. Contact RCG  for all of your rollover and retirement related questions.
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