Question

Discuss the eligibility and coverage, including the definition of “highly compensated” for employee benefit purposes of a qualified plan

Answer 1

401(k) Contribution

it is an insurance against employees leaving early.

It is plan that retirement saving plan sponsored by an employer.

taxes are not paid until the money is withdrawn from the account.

it can help you save, it has plenty of restrictions and caveates.

HOW MUCH SHOULD YOU PUT IN

As much as possible, being mindful that you’ll need to have enough money to live, eat and pay down any debt you have. At the very least, invest enough to get the full matching amount that your company pays to match your contributions. You don’t want to leave free cash on the table. Nearly every plan offers matching funds.

Type of 401(k)

401k type	Tax rules	Withdrawal rules
Traditional	Wages are contributed before taxes from each paycheck, like a deferred salary. Taxable income drops by the amount you contribute. You pay income taxes on contributions and earnings upon withdrawal.	No access to your funds before age 59 ½ or if you leave your employer at age 55 or older. If you dip in early, expect a 10% penalty — on top of the usual tax bill.
Roth	Contributions are made with money that’s already been taxed. No taxes paid upon withdrawal.	Better flexibility: free access to your money as long as you’ve held the account for 5 years.