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401(k) Plan

401(k) plan- the most popular defined contribution plans are based on section 401 (k) of the Internal Revenue Code, and called 401(k) plans. Here the employee authorizes the employer to deduct a sum from his or her paycheck before taxes, and to invest it in the bundle of investments in his or her 401 (k). The deduction is pretax, so the employee pays no tax on those until after he or she retires (or removes the money from the 401 (k) plan). The person can decide to deduct any amount up to the legal maximum.

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