Highlights
- Individual account plan
- 401k is a variation of a profit sharing plan in which a participant elects to defer a portion of his compensation. The portion deferred into the plan is not currently subject to federal income tax.
- A participant may elect to defer 100% of compensation up to a maximum amount determined annually by the IRS – $23,500 in 2025.
- Participants age 50 and over can make a $7,500 “catch-up” contribution.
- Employee deferrals are 100% vested at all times.
- The employer may also make a separate “matching” contribution. This contribution is a percentage of the employee’s deferral.
- Cash or deferred arrangements are subject to a special non-discrimination test, which compares the amount of contributions made to the plan on behalf of the highly compensated employees versus the non-highly compensated employees.
401k savings are deducted before income taxes…
| No Plan | 401 (K) Plan | |
| Earnings | $1,666 | $1,666 |
| To 401(k) (pre-tax) | $0 | $100 |
| Taxes | $273 | $245 |
| FICA | $119 | $119 |
| Savings (After-Tax) | $100 | $0 |
| IN YOUR POCKET | $1,174 | $1,202 |
Immediate Tax Savings with 401(K) on every paycheck
| TAX SAVINGS EACH PAYCHECK | $28 |
| TAX SAVINGS PER YEAR (26 Pay Periods/Year) | $728 |
Investment yields
$100 per month investment (Assumes interest between 8% and 11.5%)