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Main Dictionary #

401 (k) Plan

A 401 (k) is an employer-sponsored retirement account into which you are allowed to contribute a portion of your salary before income tax, thus reducing the amount of taxable income for the year. If you choose to withdraw 401 (k) funds before age 59.5, there will be a 10% penalty and the amount will be subject to federal and local (state) taxation. Your employer may also contribute to your retirement savings account (usually up to 6%), but you will not be entitled to these funds until after you have worked for the company for a certain amount of time.

401 (k) explained

In addition to the basic state pension (Social Security), there are several unified voluntary pension plans in the United States in which the employee, the employer, or both contribute a certain amount to the employee's individual retirement account each month.

Retirement plans are very flexible: there are options in which the accumulated funds are invested at the employer's discretion; there are also options in which the employee himself takes an active part in it. The plans also have different tax exemption schemes. Banks even consider the type of retirement plan and the amount of money in it when granting a loan. Retirement account funds are tax-exempt. However, if you decide to withdraw your money early (before you reach retirement age, which is 65), you'll have to pay both taxes and a 10 percent penalty. You won't pay taxes or penalties in special cases, such as when you withdraw money to buy your first home or to pay for college.

The best known American retirement plan is the 401 (k) match, under which money is contributed to it by both the employer and the employee, with the latter managing the investment process. The employee can deduct up to 15% monthly from his salary to his personal retirement account, but no more than $11,000 per year. The employer also contributes a percentage of the employee's deductions to this account each month - usually 30-50%, but sometimes as much as 100%. Westing is a common practice. Taxes are already paid on the entire amount received in retirement (i.e., the EET scheme is used).

Money from the 401 (k) can be invested in certain mutual funds, working with the company, as well as in stocks, bonds, and just leave it in the accounts, while choosing any strategy - from conservative to aggressive. You can remain "silent" - then the broker who serves this account automatically allocates money to funds and securities in accordance with the strategy defined by the employer (it is, of course, public). 

Usually the employer allows his employees to use the 401 (k) money to buy his own shares (which, by the way, was abused by employees of the infamous Enron). And if the employee doesn't take the initiative in managing his account, the employer can invest a certain percentage of his 401 (k) money in his own shares "by default". To be fair, a 401 (k) is not a cheap plan for an employer, and it applies mostly to large corporations like General Electric. That is, the stocks in which the pension money will be invested are at least liquid.

The second most famous type of American pension plan is the so-called IRA (Individual Retirement Account). The investment opportunities there are just as wide, but according to this plan, not more than $5,000 can be deposited into a personal account annually. Money deposited into a personal account under a Roth IRA is taxed at entry and is not taxed when you receive it in your old age, that is, at exit (the TEU scheme). Accordingly, there are no penalties for early withdrawal. Under the Traditional IRA scheme, contributions are tax-exempt; there are penalties for withdrawing before retirement.

There are several other types of retirement accounts, including defined benefit (as opposed to defined contribution plans like 401 (k)s), in different variations. Personal accounts for all types of voluntary plans are maintained by either businesses or retirement account administrators. Money from a voluntary account can be withdrawn all at once or in installments at will when you reach retirement age. 

If the company using a private pension plan goes bankrupt, the Pension Benefit Guaranty Corporation (PBGC) takes over. It takes over all company pension funds and records pension obligations. However, as far as 401 (k) plans are concerned, there is virtually no problem with them. The other thing is the "obsolete" defined benefit plans, because of which the PBGC deficit is constantly growing.

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