Get to know the 401(k) plan
These plans are powerful tools for businesses. They provide many benefits to employees and employers.
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Everything you need to know about the 401(k) plan.
The biggest advantage of a 401(k) plan is that contributions are elective and can create a tax deduction. In addition, all income and gains from plan assets grow without being taxed.
A 401(k) is the best way to retire with real wealth because of the power of compounding interest. Investment gains are not taxed until distributed. Plan assets can be carried from one employer to another and contributions can be made easily through payroll deductions.
In general, a 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. But there are a number of different types of 401(k) plans.
The third-party plan administrator (TPA) performs the most important functions in terms maximizing tax and retirement benefits for the plan’s business owner(s). The plan administrator is the person or entity responsible for the day-to-day plan operations and administration.
The primary purpose of a record-keeper is to keep track of the plan money. Record keepers are also responsible for maintaining the accounting of plan contributions and what they have earned.
Plan sponsors must test traditional 401(k) plans each year to ensure that the contributions made by and for rank-and-file employees (non-highly compensated employees (NHCE)) are proportional to contributions made for owners and managers (highly compensated employees (HCE)).
In all 401(k) plans, participants can contribute through salary deductions and it is 100% elective. The employer can decide on the business’s contribution to participants’ accounts in the plan.