401(k)

Definition

A 401(k) is a retirement savings plan sponsored by an employer. It allows employees to save and invest a portion of their paycheck before taxes are taken out.

5 Must Know Facts For Your Next Test

1. Employee contributions to a 401(k) are deducted from gross pay, reducing taxable income for the year.
2. Employers may offer matching contributions as an incentive for employees to participate in the plan.
3. The maximum contribution limit for employees under 50 in 2023 is $22,500.
4. Withdrawals from a 401(k) before age 59½ may incur a penalty and are generally subject to income tax.
5. Employers must report both employee contributions and any matching contributions on payroll records.

Review Questions

• How do employee contributions to a 401(k) affect their taxable income?
• What is the penalty for withdrawing funds from a 401(k) before age 59½?
• Are employer matching contributions required, and how should they be reported?

Related terms

Gross Pay: Total amount earned by an employee before any deductions.

Payroll Tax: Taxes imposed on employers or employees, calculated as a percentage of the salaries that employers pay their staff.

Matching Contribution: Employer's payment into an employee's retirement account based on the employee's own annual contribution.