A 401(k) plan enables employees to make pretax or after-tax contributions to a 401(k) account. Employees usually have the ability to choose the investments they make as long as the investments conform to plan options and requirements. Some employers match their employees’ contributions to a certain extent, and employer contributions are mandatory for safe harbor and SIMPLE 401(k) plans. The Internal Revenue Service and employers set caps on the plans and enact limits that govern when and how employees can withdraw plan assets. There are often penalties when an employee under retirement age withdraws money from his or her plan. Many 401(k) plan providers are major brokerages, and they provide resources for employees to determine factors such as their risk tolerance and how much to invest.
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