401k plan Definition
A deferred contribution plan set up by an employer that allows employees to deduct a portion of their salary from their paycheck to be set aside for retirement on a pre-tax basis. Currently there is a limit of $12,000 that can be contributed to a 401(k) but will continually rise to $15,000 by 2006.
Employers may also contribute a full or partially matching amount. Contributions to this plan, as well as investment earnings and interest are not taxed until the participant withdraws the money from the plan, which is typically at retirement. If money is withdrawn before age 59 1/2, he or she will be subject to a 10% withdrawal penalty tax.