Definition of 401(k)

"401(k)" refers to Section 401(k) of the U.S. Internal Revenue Code, which authorizes a deferred compensation plan set up by an employer for the benefit of employees in a tax-favorable manner. Under a 401(k) Plan, employees can set aside money for retirement on a pre-tax basis. Employers are allowed to match a percentage of the amount that employees contribute to the 401(k) Plan as well as investment earnings earned by the 401(k) plan are not taxed until the employee withdraws the money. If an employee wishes to withdraw all or a portion of his funds from the 401(k) Plan prior to the retirement age, there will be an early withdrawal penalty. If an employee changes employers, he has the ability to "rollover" his 401(k) Plan amounts into a new 401(k) Plan of the employer without tax.