The idea to create a 401k retirement plan has not been the perfect solution because not enough people put enough money into it.
An article in the Wall Street Journal of Feb., 2011 says :
"The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement."
When you create a 401K retirement plan you add money and the dollars added are not taxed.
A traditional 401(k) account is funded with pre-tax dollars and, in general, tax must be paid when the original contribution and earnings are withdrawn.
The employer's matching funds are added pre-tax, as well.
In recent years, there has been a 401(k) plan that with certain amendments can allocate some or all of their contributions to a separately-designated Roth account.
This would be the Roth 401K where income tax has to be paid or withheld during the year of the contribution.
This is a reverse in a way of the regular 401K in that when you finally take qualified distributions the money, and it's earnings are tax free.
You'll have to think about it first and figure out what you want to do with that.
All employer matching funds are deposited into the account on a pretax basis, even if the employee's contributions are all Roth contributions.
Employer contributions are sometimes regulated with agreements that require the employee work for the company for a specified number of years before they can keep the matching funds from the employer.
Qualified distributions from a designated Roth 401(k) account, including all income, are tax-free.
The contribution limit for 2012 is $17,000
Self-Employed - Create a 401k Retirement Plan
If you don't work for someone but are self employed you can also
create a 401K retirement plan.
There are differences from a 401 plan where you work for someone else.
- IRS Form 5500 doesn't have to be filed until your account reaches $250,000.
- You can consolidate IRA's and some other plans into the 401K
- Contribute up to 25% of your yearly pay as profit-sharing.
- You can borrow money against the 401K up to half of it's value or $50,000
- You can contribute what you want each year - there is no schedule
- You will have higher limits of contributions
- You can set it up as a Roth 401k with its tax advantages of tax free withdrawal
- You can have a job with a 401k, and a business with a 401k, but the total would be restricted by the amount of their employer 401k caps.
More information. How can I build a nest egg when you create a 401(k) retirement plan.