For employees, most companies offer 401k plans, which allow for retirement savings without immediate tax penalties. Each business has a different 401k plan because the company itself sets them up. 401k plans fall into the category of “defined contribution,” which means that the amount set aside for the plan is decided by the employee.
If you choose to contribute to a 401k plan, you tell your employer how much money you would like to put into it. When you get your paycheck, the amount is deducted before the money is taxed. This allows you to pay less income tax. Occasionally, employers have a match program for your contributions.
A plan administer invests the funds that you put into the plan for you. You decide what type of investments you want to put your money into and they make the moves. They have different type of investment options depending on the amount of risk you are willing to take on your money.
If you take the money out of this type of savings plan before you are 59 and a half years old, you will be subject to a 10% IRS penalty and be taxed on the amount.
