401(k) continued

 

401(k) Company Match and Profit Sharing

Companies may choose to include company match or profit sharing programs in their 401(k) contributions. Companies often use these features as a way to promote employee recruitment and retention.

• Company match: This option allows employers to match your 401(k) contributions each pay period, usually up to a fixed percentage. for instance, if you contribute 15% of your pretax pay to your 401(k) every pay period, your employer might match your contributions dollar-for-dollar up to 5%.
• profit sharing: in this option, your employer makes one large annual contribution to your 401(k) plan based on company profits (usually at the end of the calendar year), rather than smaller contributions each pay period.

The potential for you to benefit from both your own contributions and those of your employer is referred to as the double contribution benefit of 401(k) plans.

401(k) Plan Variations

Over the years, the government has developed many 401(k) plan variations to help companies tailor plans to their budget, organizational structure, and industry. The two most notable variants are Roth 401(k)s and solo 401(k)s.

• Roth 401(k): Traditional 401(k) plan contributions use pretax dollars, are income tax-deductible, and grow tax-deferred until withdrawal. Roth 401(k) plan contributions use after-tax dollars and are not deductible, but are never taxed. Companies that offer roth 401(k) plans allow you to divide your contributions between roth and traditional 401(k) accounts.
• Solo 401(k): Solo 401(k)s are designed to give sole proprietors (and their spouses) and some types of business partnerships the double contribution benefit of traditional 401(k)s. Solo 401(k)s offer higher annual contribution limits (relative to the participant's income) than other small company plans, such as SEP and SIMPLE IRA's and also permit after-tax Roth-style contributions.