401(K) / 403 (B) PLANS
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What is a 401(k) Plan
A 401(k) plan is a employer established qualified retirement program which allows eligible employees the ability to make deferred salary contributions on a pre-tax/post-tax basis. Employers who offer 401(k) plans also have the ability to make matching or non-elective contributions directly to the eligible employees plans. In certain circumstances, employers also may add a profit sharing component to the plan. All earning within a 401(k) plan accrue on a tax deferred basis. 401(k) plans are for other than non for profit entities.
What is a 403(b) Plan
Like a 401(k) plan, 403(b) plans allow employees of certain organizations the ability to make deferred salary contributions on a pre-tax depending on the type of plan. The contributions than grow on a tax-deferred basis. 403(b) plans are retirement savings plans that are made available to public education organizations as well as IRS Code 503(c)(3) organizations.
Traditional and Roth 401(k) Plans
There are two ways of setting up 401(k) plans and their contributions and earnings from a tax standpoint. The traditional 401(k) plan allows for employees to make contributions to their plan pre-tax. Once the contribution has been made, the account grows on a tax-deferred basis. In this model, all withdrawls are taxed as income. In 2006, the IRS established the Roth 401(k) option. This allows participants to make contributions with after tax dollars. Those contributions also grow on a tax deferred basis, however all withdrawls are made tax-free as long as certain conditions are met. Roth options are now available in more than 50% of company 401(k) plans.