What Is a 401(k)?
A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.
401(k) plans, named for the section of the tax code that governs them, arose during the 1980s as a supplement to pensions. Most employers used to offer pension funds. Pension funds were managed by the employer and they paid out a steady income over the course of the retirement. (If you have a government job or a strong union, you may might still be eligible for a pension.) But as the cost of running pensions escalated, employers started replacing them with 401(k)s.
With a 401(k), you control how your money is invested. Most plans offer a spread of mutual funds composed of stocks, bonds, and money market investments. The most popular option tends to be target-date funds, a combination of stocks and bonds that gradually become more conservative as you reach retirement.
Who can participate in a 403(b) plan?
Eligible employees of Code Section 501(c)(3) tax-exempt organizations;
Eligible employees of public school systems. A public school system is defined in Code Section 170(b)(1)(A)(ii) as an education organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly conducted. Included in this category are employees of:
- Public schools
- State colleges
Eligible employees of churches;
Employees of public school systems organized by Indian tribal governments;
Ministers employed by Code Section 501(c)(3) organizations;
Self-employed ministers, treated as employed by a tax-exempt organization that is a qualified employer; and Ministers (chaplains) who meet both the following requirements:
They are employed by organizations that are not Code Section 501(c)(3) tax-exempt organizations, and They function as ministers in their day-to-day professional responsibilities with their employers.