408(k) Plan: What it is, How it Works, Compared to 401(k)

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Definition of '408(k) Plan: What it is, How it Works, Compared to 401(k)'

A 408(k) plan is a retirement savings plan sponsored by a tax-exempt organization, such as a church, school, or nonprofit organization. It is similar to a 401(k) plan, but there are some key differences.

**Who Can Use a 408(k) Plan?**

Any employee of a tax-exempt organization can participate in a 408(k) plan. The plan can also be offered to self-employed individuals who work for their own businesses.

**How Much Can I Contribute to a 408(k) Plan?**

The maximum contribution limit for a 408(k) plan is the same as the limit for a 401(k) plan, which is $20,500 in 2023. However, there is an additional catch-up contribution of $6,500 that can be made for those who are age 50 or older.

**How Are 408(k) Plan Contributions Taxed?**

Contributions to a 408(k) plan are made with pre-tax dollars, which means that they are deducted from your income before taxes are calculated. This can lower your taxable income and reduce your tax bill.

**How Are 408(k) Plan Withdrawals Taxed?**

Withdrawals from a 408(k) plan are taxed as ordinary income. However, there are some exceptions to this rule. For example, withdrawals made after age 59 1/2 are eligible for the 10% early withdrawal penalty.

**How Do I Roll Over My 408(k) Plan?**

When you leave your job, you have the option to roll over your 408(k) plan to another retirement plan, such as an IRA. This is a good way to keep your money invested and avoid paying taxes on your withdrawals.

**How Does a 408(k) Plan Compare to a 401(k) Plan?**

There are some key differences between 408(k) plans and 401(k) plans. Here is a comparison of the two plans:

* **Employer match:** 401(k) plans typically offer an employer match, which is a contribution that the employer makes to the employee's plan account. 408(k) plans do not offer employer matches.
* **Plan fees:** 401(k) plans typically have lower plan fees than 408(k) plans.
* **Plan availability:** 401(k) plans are only available to employees of for-profit companies. 408(k) plans are available to employees of tax-exempt organizations, as well as self-employed individuals.

**Which Plan is Right for Me?**

The best retirement plan for you depends on your individual circumstances. If you are an employee of a for-profit company, a 401(k) plan may be a good option. If you are an employee of a tax-exempt organization or a self-employed individual, a 408(k) plan may be a good option.

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