How do 401k plans work?

A 401k plan is established by an employer to assist their employees to save for retirement. Funds which are contributed into the plan by the employer are typically treated on a tax-deductible basis, although some plans offer the option to contribute on an after-tax basis. The funds grow on a tax-deferred basis and are taxed only upon withdrawal. Funds withdrawn prior to the age of 59 ½ are subject to early withdrawal fees and income taxes, while funds withdrawn after the age or 59 ½ are treated as ordinary income. Plan participants must follow the required minimum distribution rules (RMDs) and must begin to withdrawal funds at the age of 70 ½ according to the IRS guidelines.

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