408(k) Plan

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DEFINITION of '408(k) Plan'

A plan set up by an employer to help employees fund their retirement. The 408(k) plan is a simplified version of the popular 401(k) plan but is intended for smaller companies (those with fewer than 25 employees). It is also available to self-employed individuals. Under the plan, employees can contribute pretax dollars to the account and thus reduce their net incomes for the year. This results in a tax savings for the contributor.

BREAKING DOWN '408(k) Plan'

Although the term 408(k) is often used to describe an account, it actually refers to the Internal Revenue Code, which details Simplified Employee Pension (SEP) accounts. The employee and the employer contribute to this account in the employee's name. Throughout the account's lifetime, deposits are not treated as income until the funds are withdrawn.

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RELATED FAQS
  1. Is a 408 (k) the same as a Simplified Employee Pension (SEP)?

    A 408 (k) is not the same as a Simplified Employee Pension (SEP). The SEP plan is a retirement plan that allows employers ... Read Full Answer >>
  2. Are mutual funds considered retirement accounts?

    Unlike a 401(k) or Individual Retirement Account (IRA), mutual funds are not classified as retirement accounts. Employers ... Read Full Answer >>
  3. Why is my 401(k) not FDIC-Insured?

    401(k) plans are not FDIC-insured because they are typically composed of investments rather than deposits. The Federal Deposit ... Read Full Answer >>
  4. What are the best ways to sell an annuity?

    The best ways to sell an annuity are to locate buyers from insurance agents or companies that specialize in connecting buyers ... Read Full Answer >>
  5. Why are IRA, Roth IRAs and 401(k) contributions limited?

    Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy ... Read Full Answer >>
  6. What are the best ways to use your 401(k) without a penalty?

    The best way to use your 401(k) retirement savings account is to take normal distributions after you reach retirement age. ... Read Full Answer >>

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