ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Definition: A 401(k) is an employer-sponsored retirement plan, sometimes called a defined contribution plan (in contrast to a defined benefit pension plan). It allows employees to make pre-tax contributions to the plan, up to a specified amount each year.

Detailed explanation-2: -Matching 401(k) contributions are the additional contributions made by employers, on top of the contributions made by employees. These matches are made on a percentage basis, such as 25%, 50% or even 100% of the employee’s contribution amount, up to a limit of total employee compensation.

Detailed explanation-3: -Employer Match Does Not Count Toward the 401(k) Limit You can only contribute a certain amount to your 401(k) each year. For tax year 2023, the limit stands at $22, 500, which is up $2, 000 from the 2022 level.

Detailed explanation-4: -A 401(k) plan is a qualified plan that includes a feature allowing an employee to elect to have the employer contribute a portion of the employee’s wages to an individual account under the plan. The underlying plan can be a profit-sharing, stock bonus, pre-ERISA money purchase pension, or a rural cooperative plan.

Detailed explanation-5: -The main difference between a 403(b) and 401(k) is the type of employer who offers them. 401(k) plans are offered by private, for-profit companies. 403(b) plans, on the other hand, are offered by tax-exempt and nonprofit organizations.