Business and Personal Finance Dictionary

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• 401(K)
  
  This type of employer sponsored retirement savings plan is funded with money deducted from your pretax salary, up to an annual cap established by Congress. In 2002, the cap is $11,000. Your employer may also limit your contribution to a percentage of your salary. That might mean that the total you can contribute is less than the federal cap. With a 401(k), you are responsible for making your own investment decisions by choosing from among different offerings offered by the plan. Those offerings typically include mutual funds, annuities, fixed-income investments, and sometimes company stock. Some plans also offer brokerage windows that allow you a much wider choice of investments. 401(k) plans offer you the double benefit of current tax savings, because your contributions reduce your taxable salary, and tax-deferred growth on your investment. Your employer may also match some or all of your contribution, based on the terms of the plan you participate in. In addition, 401(k) plans are usually portable, which means that you can move your accumulated assets to a new employer's plan or a rollover IRA when you change jobs. Amounts you withdraw are taxed at the same rate as other income you receive at the time of withdrawal, but you may owe an additional 10% federal tax penalty if you make those withdrawals before you reach age 59 1/2. 401(k) plans are increasingly replacing traditional defined benefit pension plans in the workplace, largely because they are less expensive to administer and shift much of the responsibility for providing retirement income to the employee.
  
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