Talk:401(k)

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	To-do list for 401(k):	edit  · history  · watch  · refresh
Here are some tasks you can do: Add inline references Expand distribution discussion to cover RMD's for inherited plans Break up the details and technical details sections into topical sections. Possibly Contributions Administration (the plan document, testing, safe harbors, QNEC, etc) Separate accounts, exclusive benefit Briefly cover profit sharing provisions. Fiduciary responsibility Fix the withdrawal of funds section. Need to consider after tax contributions, pre-1972, 1986-whatever contributions, and the language on the penalty and exceptions needs to be consistent. It's a little contradictory from the first to second paragraphs.

See Talk:Retirement plan Chris 02:54, 30 Sep 2004 (UTC)

Contents 1 History 2 Governmental 401(k)'s 3 Repeated text? 4 401k crash of 2001 5 Is "401K" an acceptable spelling? 6 A profit-sharing plan? 7 What's the difference between a 401K and a 401a? 8 401(k) Disbursement 9 Another quibble 10 WHICH IS BETTER 401(k) or SEP IRA??? 11 Missing controvery section

[edit] History

The history of 401(k) started with a regular bank and a regular costumer.the costumer said"yo put this shiznet in da bank from my pay check and don't you make me come here agian!!!!" the bank said " a'ight just give some to me!!!!!"

Does anyone have information about the origination of the 401K as a Congressional "favor" for Xerox? This was mentioned in the new Frontline episode regarding retirements. The gist is that the 401k was not intended for the general public, but was a favor for some executives at Xerox as a way of avoiding taxes. Here's the Frontline link (you can watch it online) http://www.pbs.org/wgbh/pages/frontline/retirement/ - Sublium 18:29, 20 May 2006 (UTC)

Anon, you didn't just add a source, you removed the other one. I've never heard of EBRI and multiple sources support the Benna story. Now they may have all been parroting from the same story, and EBRI may be reputable and in the right, but I'm not convinced. I'll try and get a copy of the 1978 Revenue act itself and look at the language. EBRI makes it sound like the act's intentions were a lot clearer than other sources do. Please see what you can find supporting EBRI's version and respond here, and sign your comments with four tildes as in ~~~~. That makes it clear what comments were from who. Thanks - Taxman 03:47, May 4, 2005 (UTC)

I'm no expert, and in fact I reviewed this page to learn about a 401(k) (great article). But I'm suspicious that the hardship withdrawal information isn't correct. My understanding is that you can generally always take out your money from a 401(k) with a 10% fee, regardless of any hardship. If you show hardship, the 10% fee isn't assessed. The article makes it sound like you have to show hardship to be able to take money out at all, and you still might get the 10% fee assessed. Doesn't seem right, I may be wrong. --Rmalloy 19:54, 16 August 2005 (UTC)

Here's another source the details the hardship rules. It probably has some things that should be added to the article, but our article is correct. All hardship withdrawals are subject to the 10% penalty unless they qualify under an exemption as detailed in the article. What that linked article calls the "other type" of hardship withdrawal is not really a hardship withdrawal at all except for the one about debt for medical expenses. The others are all separation from service and disability which is essentially equivalent to a separation. Their third one is not a hardship withdrawal, but a QDRO or EDRO for divorce. That's just standard splitting of an account. Also, withdrawals do require a hardship to get, or a loan can be taken instead if the plan allows. Now not everybody knows or follows the rules perfectly, so an administrator or employer may allow withdrawals that don't fit into the hardship rules, but it's basically illegal, and tax is due on it. But it comes down to who is going to catch it in some cases, and like anything else illegal can be gotten away with. The trustee or plan admin is essentially liable if they were to not follow the rules correctly. - Taxman ^Talk 20:38, August 16, 2005 (UTC)

Thank you so much, that's interesting. I was thinking about putting my money in 401(k) for medium term (e.g. 10-year investments). Given an income tax rate of 30%, you only need above about a 3% ROI to make a 401(k) a better 10-year investment than a post-tax mutual fund. The tax exemption on interest outweighs the 10% early-withdrawal penalty. But now this plan seems risky :(. --rmalloy 21:06, 16 August 2005 (UTC)

Well keep in mind, the 401(k) is only tax deferred. All money withdrawn (a loan is not a withdrawal, you have to pay it back or else it is taxed as a withdrawal) from it is taxable income in the year withdrawn. I suppose I should make that more obvious in the article. - Taxman ^Talk 21:34, August 16, 2005 (UTC)

The article already mentions why it makes a huge difference. With the 401(k), the interest compounds without being taxed annually. It's only taxed on the back end. If P is the principal, T is the tax rate, and I is the interest rate (assume T and I constant), then after ten years you have the following. 401(k): 0.90*T*P*(1+I)^10. Regular investment: T*P*(1+I(1-T))^10. Given a reasonably high I and T, you come out substantially better with the 401(k). I think the article is totally correct right now, and very well-done. --Rmalloy 22:09, 16 August 2005 (UTC)

Well perhaps, but that should probably be 1-T everywhere, and the one for regular investments improperly both applies the initial 1-T to the whole amount and assumes all of the return is taxable income each year. It's more likely to be one or the other, or a mix. One one extreme, if all of the income is taxable each year, that adds to the basis, so there would be no initial (1-T) for the overall taxation. One the other, if all of the return is capital gain, with no taxable income each year, the second 1-T disappears. So having them both at the full tax rate (capital gains tax is lower than most of the income tax rates) overestimates the taxation. That means except in the extremes you can't make a simple formula like you are looking for for the regular investment, but you could spreadsheet it and/or run a stochastic simulation. I probably should have skipped all this, since even though it is interesting, we're well beyond the bounds of this particular article, and probably any that should be on Wikipedia. In any case, glad you found it a good article. I should probably more explicitly state my references though. - Taxman ^Talk 23:16, August 16, 2005 (UTC)

I'm fairly sure one part of that is inacurate. I work in the industry and I beleave that in a 401(k) plan the early withdrawal penaulty is still assesed under a hardship distribution. I think this common misconception comes from the fact that in an IRA these circumstances would make you exempt from the 10% tax. I'll see if I can find a source. It might be worth noting that the last two hardship were added in 2006, and it's very common for employers to use only the first four (as they've not chosen to update the plan document).

Also, I think the 402(g) contribution limit is going up $1000 a year, rather than $500, as is the catch-up contribution limit. This has historically been the case, but it might be changed for 2007. I'll try to find a source on this also. Rafngard169.200.225.34 14:20, 21 April 2006 (UTC)

Hello, I am in the industry and think we're missing an important note on hardships, the safe harbor rules are not the only reason an individual may take a hardship withdrawal. Taxman, as you mention, the administrator is the one who makes the decisions and my understanding is that as long as the hardship is immediate and necessary and the definition is applied consistently, the administrator can qualify other reasons for hardship withdrawals, ie bail, medical expenses outside the safe harbor definition, etc. Also, The rules note that a hardship may only be taken once other means are exhausted and most interpret this to mean if a loan feature is available it must be taken. That may be true, UNLESS the loan itself would cause the situation causing the hardship to worsen. When wouldn't it?! Thanks for your time. Jimi magic 17:49, 27 October 2006 (UTC)

The Catchup Contributions are not increasing for 2007 [1] This article says they are increasing $500. They have increased $1000 a year since 2002. This article should be changed. JohnB —The preceding unsigned comment was added by 64.246.202.2 (talk • contribs). (13 March 2007)

What the wording is meant to say is that they will go up with inflation, but will only increase in $500 increments. So it won't increase for a some number of years and then it will go up $500, then won't go up for some more years and then it will again by $500. That's what the wording that's in the article means, and is the IRS wording. Any idea on how to make that clearer without being even more confusing and overly wordy? - Taxman ^Talk 23:08, 13 March 2007 (UTC)

[edit] Governmental 401(k)'s

The 1986 date for when governmental plans had to be established by doesn't seem right to me, but I can't find the date definitively anywhere now. I seem to remember a cutoff more like 1994. Anyone know a way to find that? - Taxman ^Talk 18:26, 17 February 2006 (UTC)

[edit] Repeated text?

Tax benefits and considerations contains a section about the 10% penalty on premature withdrawl from a 401(k) twice (or so it seems to me). Is this a mistake or am I missing something? --Plamoni 20:08, 14 March 2006 (UTC)

Not really, 10% is metioned twice. Once for hardship withdrawals and again for withdrawals for people under the age of 59 1/2. Hardships are a type of withdrawal so both are subject to the 10% penalty.

[edit] 401k crash of 2001

I lost a lot of money in my 401k during the stock market plunge in 2000-2001. I suspect a lot of other people did too. Any facts/stats on that? I am wary about re-investing. There are some who consider that the mass selling of the 401k to the rank and file was a class conspiracy to redirect more wealth to the top. Numbers? ---Ransom (68.121.52.29 20:00, 18 March 2006 (UTC))

I would say a discussion of the market downturn of 2001 would be better served in a separate article on that specific issue, if it doesn't already exist. Separately, the "conspiracy" you speak of is probably the product of a general misunderstanding of investing and the relationship to 401(k)'s and should be documented before being cited in any article. Jimi magic 19:17, 30 October 2006 (UTC)

[edit] Is "401K" an acceptable spelling?

I've noticed that while the article mostly uses "401(k)" with parentheses around the 'k', there are a few times where it is spelled "401K" or "401k" without parentheses. I was about to correct them, but I'm not 100% sure. Is 401K an acceptable alternate spelling?

Depends on what you mean by acceptable. This article should be consistent and probably with 401(k) which is most "correct". So if you're referring to this and other WP articles, changing to that is probably better, especially given we should be consistent with the article title, though for other purposes 401k lower case is fairly common too if the context is clear. - Taxman ^Talk 18:07, 6 June 2006 (UTC)

As the article mentions, 401(k) is the subsection containing the language that created tax deferred savings plans, hence the parentheses around the k. It should be written as such or is otherwise technically inaccurate. Jimi magic 16:38, 31 October 2006 (UTC)

[edit] A profit-sharing plan?

The article currently says: "A 401(k) plan is a profit sharing plan with a qualified Cash or Deferred Arrangement ...". The article for "profit-sharing plan" says it refers to one in which an employee shares in the profits of the company he works for. Yet a 401k can be (and often is) completely independent of your employer's profits -- the returns can have absolutely nothing to do with your current employer. So how can a 401k be a "profit sharing plan" in the conventional sense of the term? MrVoluntarist 16:49, 21 June 2006 (UTC)

It's just IRS technicalities. The type is a profit sharing plan, with a cash or deferred arangement. It's a result of the history of these plans. The cash or deferred arangement is what became known as the 401(k) and now you can have 401(k)'s without a profit sharing component. But you're also confusing how the plan works and it's type with how they are funded. A profit sharing plan in the US is where the employer makes a contribution to a qualified trust on behalf of the employees, based on the profits of the company that year and the decision of the company, etc. That contribution may be made in cash into employer stock or there may be investment options such as mutual funds, etc available in the profit sharing part of the plan, just as in the 401(k). So the returns on the contributions to the profit sharing plan can also be completely independent of the employer too. For the 401(k) portion the only difference is the employee makes the contributions (and there may be a match). I'm not sure my explanation made anything any clearer, the only other option is for you to dig into various materials that describe the technicalities of these plans. - Taxman ^Talk 18:10, 21 June 2006 (UTC)

Not quite sure I have that responsibility. Currently, this article's use of "profit-sharing plan" conflicts with the article on profit sharing plan. My responsibility is to make sure they are consistent at all times. They currently contradict each other. I think the best resolution now is to say that a 401(k) plan is a profit sharing plan under the IRS's definitions. Also, the employer's matching 401k contributions are not a function (in the mathematical sense) of the employer's profits, so even on the definition you gave it doesn't qualify as one. Where the money/shares from the profits go, I agree, may vary widely. But both the employee and employer 401k contributions have nothing to do (necessarily) with the employer's profits, so based on no definition, either Wikipedia's or the one you gave, would a 401k be a profit-sharing plan. MrVoluntarist 18:18, 21 June 2006 (UTC)

What I'm saying is the definitions don't conflict. There are other problems with that paragraph though, and I'll try to fix them more thoroughly when I get some time in front of the sources I need. - Taxman ^Talk 11:33, 22 June 2006 (UTC)

Yes, they do conflict. The profit sharing plan article gives the definition that I believe everyone understands the term to mean: you share in the profits of the the company you work for. A 401k, however, need not have any relationship to the company's profits whatsoever (except in the reductionist sense that they can't pay you unless they have enough to cover expenses for the time being). My employer contributes to my 401k, but the contribution does not depend on their profitability; it's a fraction of my contributions, up to a certain level. None of the investments in it are my employer. In what sense am I "sharing in the profits" of my employer? Are they making some miniscule profit-dependent deposit into my account that I don't know about? MrVoluntarist 13:11, 22 June 2006 (UTC)

You're taking your understanding of profit sharing as a concept and saying that conflicts with a 401(k) being technically a profit sharing plan. They don't conflict, your understanding of the concepts and applying it to specifics does. And yes, the match has to do with their profits, but that has nothing to do with it being classified as a profit sharing plan either. They don't have to make any profit sharing contributions for it to be a profit sharing plan. - Taxman ^Talk 14:57, 22 June 2006 (UTC)

Yes, yes they do, in the conventional sense of the term, and the sense of the term used in the profit sharing plan article. No, the match has nothing to do with their profits; it is purely a function of my contributions and salary. Now, the IRS can use whatever crazy definition of "profit-sharing plan" that it wants to. A 401k as such need not involve any profit-sharing; ergo, under the normal definition of the term, it is not a profit-sharing plan. The company could never make a profit, yet your 401k can still have value. Ergo, it is not a "profit-sharing plan", just a "plan". MrVoluntarist 15:19, 22 June 2006 (UTC)

Lot's of words have meanings beyond their obvious ones. That doesn't mean there's a contradiction. Part of your confusion might be that there is no article on the specific topic profit sharing plan, instead that redirects to profit sharing, the general concept. There's only one sentence in that article on profit sharing plans specifically. And yes, the match does have to do with profits, lots of large companies vary the level of their match as needed according to their profits. Auto companies do it all the time. The company could never again make a profit and the money contributed to a profit sharing plan would still have value and grow according to whatever it is invested in. Basically you don't have enough context about what you are arguing about, so why are you? What fixes do you propose? Nothing you can argue will change the fact that technically a 401(k) is a profit sharing type plan. - Taxman ^Talk 17:15, 22 June 2006 (UTC)

A profit-sharing plan, in common usage, must involve profit-sharing. I'm sorry, but that's just how English works. I accept (like I said probably thrice already) that the IRS may define the term divergent from common usage. All I ask is that it say this instead: "The IRS classifies the 401(k) as a profit-sharing plan, even though it need not involve any profit-sharing, nor have any direct relationship to the employer's profits." We could then make a separate "profit-sharing plan" article that clarifies the ingenious definition that somehow doesn't require profit-sharing. As for your point about "matching contributions being profit sharing" ... no. First of all, matching contributions aren't required. Second, it is still arbitrarly set after the fact, even if it's correlated with profits. Adjusting it due to having a good year is not "profit-sharing" it is just another instance of a company bidding higher compensation for labor due to better ability to sell its profucts. My company has had varying profitability yet always had the same formula for matching contributions.

Does my proposed change sound reasonable? MrVoluntarist 17:36, 22 June 2006 (UTC)

It's workable, but has two problems. It's too long and roundabout on a minor point already basically covered by the word technically which already alerts people to the fact that the common meaning is not being used, and I'm not sure where to check, but that may be a DOL regulatory issue, not technically an IRS one. They're intertwined. - Taxman ^Talk 19:06, 22 June 2006 (UTC)

Alright, we can leave it as "U.S. regulations classify a 401k as a profit-sharing plan, though it need not involve profit-sharing." Using the term "technically" isn't good enough -- that would probably be taken to mean "the 401k meets the literal definition of a profit sharing plan" when, as seen above, they don't, they just meet some regulatory agency's usage of the term, not the "technical" meaning. Is more confusing than clarifying. It should state that it need not involve profit-sharing, so as not to imply a 401k guarantees a share of the employer's profits. (Except in the useless sense that what they pay you must come from the difference between revenues and other expenses.) MrVoluntarist 19:18, 22 June 2006 (UTC)

Dear fellow editors:

I am definitely not an expert in this area of tax law. However, I would like to provide the following materials for discussion purposes with respect to "profit-sharing plan" and "401(k) plan."

The term "profit-sharing plan" apparently is not defined in either section 401 or 414, or in section 7701 of the Internal Revenue Code. However, the technical legal definition is found in the related Treasury Regulations. Immediately below is just the gist of the formal legal definition, and then I'll follow with a more understandable secondary authority summary of the definition -- from the tax law editors at CCH.

The Treasury Regulation at 26 C.F.R. sec. 1.401-1(a)(2) provides (in part):

(2) A qualified [ . . . ] profit-sharing [ . . . ] plan is a definite written program and arrangement which is communicated to the employees and which is established and maintained by an employer --

[ . . . ]

(ii) [ . . . ] to enable employees or their beneficiaries to participate in the profits of the employer's trade or business, or in the profits of an affiliated employer who is entitled to deduct his contributions to the plan under section 404(a)(3)(B), pursuant to a definite formula for allocating the contributions and for distributing the funds accumulated under the plan (see paragraph (b)(1)(ii) of this section) [ . . . ]

The Treasury Regulation at 26 C.F.R. sec. 1.401-1(b)(1)(ii) provides:

(ii) A profit-sharing plan is a plan established and maintained by an employer to provide for the participation in his profits by his employees or their beneficiaries. The plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment. A formula for allocating the contributions among the participants is definite if, for example, it provides for an allocation in proportion to the basic compensation of each participant. A plan (whether or not it contains a definite predetermined formula for determining the profits to be shared with the employees) does not qualify under section 401(a) if the contributions to the plan are made at such times or in such amounts that the plan in operation discriminates in favor of officers, shareholders, persons whose principal duties consist in supervising the work of other employees, or highly compensated employees. For the rules with respect to discrimination, see §§1.401-3 and 1.401-4. A profit-sharing plan within the meaning of section 401 is primarily a plan of deferred compensation, but the amounts allocated to the account of a participant may be used to provide for him or his family incidental life or accident or health insurance.

For more understandable secondary authority, the following is an excerpt from the editorial commentary by the staff lawyers and CPAs at CCH, one of the leading publishers of tax law materials in the United States (note: copyrighted material, excerpted under the Fair Use Doctrine):

Profit-sharing plan. A profit-sharing plan is established and maintained by an employer to provide for the participation in profits by employees or their beneficiaries. The plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the occurrence of some event such as layoff, illness, disability, retirement, death, or termination of employment. Amounts allocated to the account of a participant may be used to provide incidental life, accident, or health insurance for the participant or the participant's family.

As indicated by the name, contributions to a profit-sharing plan are characteristically made from the employer's profits. This is not, however, a requirement of the Internal Revenue Code. Contributions may be made even though the employer has no current or accumulated profits, and --contradictory as it may sound --a not-for-profit (tax-exempt) organization may maintain a profit-sharing plan.

--from: CCH Standard Federal Income Tax Reporter ¶17,507.028, Qualified Pension, Profit-Sharing, Stock Bonus and Annuity Plans: Types of Qualified Plans: Major types of defined contribution plans, Copyright CCH Incorporated, a Wolters Kluwer company (downloaded on 22 June 2006 from CCH Standard Federal Income Tax Reporter, CCH Tax Research Network) (bolding added by Famspear).

Now, regarding a 401(k) plan: 26 U.S.C. § 401(k)(2) states (with bolding added by Famspear):

A qualified cash or deferred arrangement is any arrangement which is part of a profit-sharing or stock bonus plan, a pre-ERISA money purchase plan, or a rural cooperative plan which meets the requirements of [. . . .]

If a qualified "cash or deferred arrangement" (a qualified CODA) is the same as a "401(k) plan," then I suppose you could say that a 401(k) could part of a profit-sharing plan, or part of a stock bonus plan, or part of a pre-ERISA money purchase plan, etc. Again, this is not my area of expertise. It seems from the language that you could have a profit-sharing plan that was partly a 401(k) and partly "something else."

I hope these materials are of some help. I'll be back later - Yours, Famspear 21:05, 23 June 2006 (UTC)

Thank you very much! This is exactly the distinction I was hoping to add to the article: in the common usage of the term, a 401(k) as such is not a "profit-sharing plan" because it doesn't have to have anything to do with the employer's profits. But the IRS does classify it as one despite this. Remember that just because the employer's individual 401k plan can include contributions that depend on profits, that doesn't make a 401k a profit-sharing plan, just as the fact that your 401k could involve investments in bonds, does not mean you can say "A 401(k) is a bond investment account." MrVoluntarist 21:40, 23 June 2006 (UTC)

Your proposed wording works, go ahead and add it in, though I still think that's way too much explanation for a small point. The term "profit-sharing plan" does have very specific definition that is not necessarily the same as what you would think of when you think of the words themselves. This is very common with technical jargon. So you can't switch back and forth between using the technical definition that is applicable to the topic at hand (401(k) in this case) and the common understanding of the terms unless you're very specific about which you are referring to, and I just don't see the value for this article. Maybe the bit about profit sharing plan should be moved to the technical subsection so that it's even more clear the technical definition is being referred to, not the common understanding. - Taxman ^Talk 22:52, 26 June 2006 (UTC)

I just think it's confusing. I grabbed my hat when I saw that, and thought, "What??? Mine doesn't get me a share of the profits!" (Not that I want it to of course -- I prefer separating labor and investment income.) Someone less knowledgeable could be genuinely misled. ("But isn't my 401k supposed to go up in value because my company had a good year?") I don't know what section to move it to, so I'll just change it right there. I don't think it messes it up too much. Maybe the sentence could be broken up? MrVoluntarist 00:23, 27 June 2006 (UTC)

The point of this whole discussion (enlightening, really) is that the 401(k), which was originally written into law in order to create supplemental tax-advantaged profit-sharing plans, became a more generic vehicle for tax-deferred savings. The interesting parts seem to me to be that (1) employer contributions don't actually have to vary depending on the sponsor's profit; and (2) that participants can also voluntarily defer compensation into these plans regardless of whether the employer contributes. That has made the typical 401(k) a very different thing from the original "profit-sharing" notion - indeed, it appears to becoming a primary retirement savings vehicle in reality. Not a sufficient one, but one all the same. --Gary 19:59, 29 June 2006 (UTC)

Not a sufficient one? You mean, if someone contributed 25% of pre-tax income from age 25 to 65 into diversified investments into a 401(k), the resulting value would not suffice to retire on? Or did you mean something else? MrVoluntarist 20:54, 29 June 2006 (UTC)

It would be great if every participant contributed 25% of pre-tax income from age 25 to 65 into diversified investments in a 401(k), but does that actually happen? I think Taxman's point is that in general a 401(k) participant is now responsible for their own funding and investing of retirement benefits, and for knowing enough to do both well. Many articles have been written on the inadequacy of the 401(k) account and the disappearance of the employer funded plan. Check out http://www.contingencies.org/mayjun06/retirement_0506.asp for one. Jimi magic 19:40, 30 October 2006 (UTC)

[edit] What's the difference between a 401K and a 401a?

[The question "What's the difference between a 401K and a 401a was posed by an anonymous user at IP 66.119.205.51 on 25 June 2006.]

Answer: Subsection (a) of section 401 of the Internal Revenue Code relates to the general requirements for a trust to be classified as a "qualified trust" for purposes of section 401. If a trust is a section 401 "qualified trust" then that trust can be exempted from Federal income tax (but not other Federal taxes such as payroll taxes) under section 501(a).

A qualified "cash or deferred arrangement" (a qualified CODA) under subsection (k) of section 401 is simply (uhh, maybe "simply" is a bad word to use here) an "arrangement" that meets the requirements of subsection (k), and is part of either a profit-sharing plan, or a stock bonus plan, or a pre-ERISA money purchase plan, or a rural cooperative plan. Of course, the definitions of those terms are too complicated for me to describe right now (even if I knew what they were without having to look them up, which I don't).

Basically, certain "arrangements" under such plans might make the "trusts to which those plans relate" NOT qualify under subsection (a) of section 401, and therefore not qualify as exempt from Federal income tax under section 501(a). What subsection (k) basically says is: Well, yes, but if the arrangement meets the complicated standards of subsection (k), then you're OK, and the arrangement will NOT cause the trust to disqualify under subsection (a). Therefore, the profit-sharing plan, or stock bonus plan, or pre-ERISA money purchase plan, or rural cooperative plan, that includes a 401(k) will not be disqualified -- or at least, if it is disqualified, it won't be because of the CODA. Now, isn't that clear as a bell?

So, basically a 401(k) is something that can be PART of a plan (a trust) under section 401(a). This means the two concepts are not mutually exclusive.

If you're still confused, congratulations, so am I. That just means we're both paying attention. Yours, Famspear 20:41, 26 June 2006 (UTC)

Famspear, you got exactly the right sections, it makes sense to me and jives with the understanding I had. :) A 401(k) plan is a 401(a) plan that qualifies under the additional rules of section k to allow salary deferral by employees. A 401(a) without that is just a bare qualified plan. I'd have to go look this up (book is at home again), but a pure profit sharing plan without a cash or deferred (401(k)) arrangement would technically be a 401(a), and I can't think of anything else that would qualify under 401(a) and not 401(k). Non profit employers can set up 401(a) plans too if they want to contribute money to their employee's retirement accounts without making their 403(b) an ERISA plan (a whole other ball of wax for a different day). - Taxman ^Talk 22:52, 26 June 2006 (UTC)

[edit] 401(k) Disbursement

I would like to suggest that an additional area of information for this topic could be the process of inheriting a 401(k) as a spouse or non-spouse beneficiary. The sponsoring company's Summar Plan Document is not mentioned but is important to understanding the process of receiving funds from a 401(k) in which you are named as beneficiary. I'm not qualified to write on the topic authoritatively but hoped someone reading this might be able to shed light on the issues.

Thanks. Joe

Thats a good point, thanks for bringing it up. Both distribution and suvivor issues should be considered along with explaining the plan document. - Taxman ^Talk 19:45, 4 August 2006 (UTC)

[edit] Another quibble

The article says:

In addition, 401(k) plans are tax-qualified plans covered by the Employee Retirement Income Security Act of 1974 (ERISA), so assets held by the plans are generally protected from creditors, which in the past was generally not true for IRA plans. This means that workers are generally more protected from their employer entering bankruptcy than with a pension program.

I don't understabnd what's meant here. Isn't a 401(k) in a separate account the employer has no control over and cannot count as an asset, nor be seized by the employer's creditors? So how is a 401(k) "more" protected than an employer pension? It seems the 401(k) is always completely protected during employer bankruptcy (except for the loss of value of shares held through it in the employer), while the employer pension is not protected. I don't see what the "more" here means. Either it's confusing language, or my understanding of 401(k)'s is poor. MrVoluntarist 18:17, 27 September 2006 (UTC)

The paragraph is mixing discussion of bankruptcy of the individual and bankruptcy of the employer, so that's part of why it is confusing. The first sentence is about individual bankruptcy and the second refers to employer bankruptcy as does the following sentences. Hopefully I've clarified it, let me know what you think. I also moved it to a more appropriate place. - Taxman ^Talk 20:02, 27 September 2006 (UTC)

Thanks, that's much better. As previously written it blurred separate issues. But in your edits, I'm not sure about "Erisa protection of 401(k) assets does not extend to workers who fail to diversify." That statement seems out of place in the passage, so I might want to modify it. I mean, ERISA doesn't extend to any loss of value of investment securities in a 401(k), so why specify that it's protection doesn't apply to those who lost money for that specific reason (failure to diversify)?MrVoluntarist 21:14, 27 September 2006 (UTC)

Good point, fixed that too. - Taxman ^Talk 21:26, 27 September 2006 (UTC)

[edit] WHICH IS BETTER 401(k) or SEP IRA???

I am a bit overwhelmed and trying to figure out which is better for me to start (per my accountant's advice), and I was wondering if there is a simple comparison chart to be able to see the details of what makes each unique, or if any of you would be able to explain it in basic terms?

My husband and I incorporated earlier this year and are now employees of our C-corp. We were advised to start either a 401K plan or a SEP. I understand the importance of saving for retirement, but don't really understand which might be best for us. And as my husband and I both already have Roth IRA's -- do we continue them as well?

Thanks so much.

Sorry, Wikipedia cannot give advice. Try either other online resources that may be able to give advice or hire an advisor that is paid to give advice. - Taxman ^Talk 21:37, 19 October 2006 (UTC)

You say that you have an accountant; he or she should be able to advise you which would be best for you, based on your particular situation.

That said, I think it would be useful for Wikipedia to have a chart which compares the different types of U.S. retirement accounts (401(k), 403(b), IRA, and the different varieties of each (Roth, Simple, Traditional, SEP, etc.)) objectively. Such a chart might include, for example, who is eligible to use it (self-employed? non-profit? government?), when taxes are taken out (when put in, or when withdrawn), how much you're allowed to contribute per year (and exceptions), what penalties may apply for early withdrawal (and exceptions, etc. That wouldn't be giving advice, just raw information, hopefully heavily referenced.

--Psiphiorg 02:51, 20 October 2006 (UTC)

[edit] Missing controvery section

Hey I was thinking that we might want to add a section on the controvery about employers getting rid of traditional pension plans in favor of 401 (K)s that are less expensive to the company.- Moshe Constantine Hassan Al-Silverburg | Talk 06:48, 8 November 2006 (UTC)

That's not really a 401(k) issue, it's a defined benefit vs defined contribution in general issue, and should probably be covered in the latter article as a separate one instead of in pension. It's also not terribly controversial, but is still worth covering. - Taxman ^Talk 13:17, 8 November 2006 (UTC)