Definition of "Section 401 (k) plan (salary reduction plan)"
Babette A. Bodie, P.A., Real Estate Agent
Coldwell Banker Residential Real Estate - Tampa Westshore
Employer sponsored retirement savings program named for the section of the Internal Revenue Code that permits it. These plans allow employees to invest pre-tax dollars that are often matched in some portion by employers. Because of their flexibility, 401 (k) s became a popular employee benefit during the 1980s. But the tax reform act of 1986 limited their use as short-term savings plans by imposing a 10% penalty on all money withdrawn before retirement. It also reduced the maximum annual contribution from $30,000 to $7000 and tightened nondiscrimination rules. Employees may still borrow the money, however, and pay themselves interest.
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