401K Plans – The Details

A 401k plan is an arrangement where an employee can decided to have a part of his or her salary, deposited into a retirement plan. The contribution is taken from the employee’s pre-tax income (some plans do however accept after-tax contributions).

The contributions made are then invested in a wide range of investments like stocks and shares, bonds and government stocks. Employers may, at their discretion and without legal obligations, match their employees’ contributions. The 2005 maximum annual contribution that may be done by an employee was $14,000. An employee aged 50 or over, has the option of making additional contributions, to catch up.

This amendment was made by the EGTRRA in 2001, and allowed catch-up contributions of up to $1,000 in 2002, $2,000 in 2003, $3,000 in 2004, $4,000 in 2005, $5,000 in 2006, and indexed thereafter.

All the above mentioned pre-tax contributions, and also the gains that are made on the 401k plan account, are only liable to tax when the funds are withdrawn. Also, according to the Growth and Tax Relief Reconciliation Act of 2001, an individual may contribute up to a maximum of $15,000 up to the year 2006, and from that point onwards the contributions

401k plans apply to employees who work in the private sector. There are other plans similar to the 401k plans, that in turn applies to employees who work in the public sector (457 plans), and for those who are employed in the nonprofit sector of the industry(403b plans).

In 1986, Congress had passed some amendments, and encouraged the employers of the private sector, to have more confidence in the 401k plans which have been a matter of regulatory and legal disagreements for years.

Since this time, the 401k plans have becoming the most popular and the most expanding type of retirement plan.

Reference: http://www.401khelpcenter.com/tracking/history_of_401k.html