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Other GIA Services - 401 (k)

What is a 401(k) plan?

A 401(k) plan is a type of qualified retirement plan. Qualified retirement plans are savings plans that receive special tax treatment in exchange for meeting numerous requirements spelled out in the Internal Revenue Code. Qualified plans are also subject to ERISA (Employee Retirement Income Security Act of 1974) and the regulations adopted by the Department of Labor under that law.

Who uses 401(k) plans?

A 401(k) plan is provided by an employer, who becomes the plan sponsor. An employee who is enrolled in a 401(k) is called a plan participant. 401(k) plans are used by businesses of all sizes, from small, unincorporated companies to large multinational corporations. They are established for many different reasons and have become quite common as an added benefit for both employers and employees.

401(k) plans are also appropriate for employers who want to offer a retirement plan to their employees and at the same time, allow employees to share the responsibility of funding the plan.

Why do employers use 401(k) plans?

One of the main reasons employers elect to establish retirement plans is the tax benefits offered by these plans. Employers are allowed a current federal tax deduction for contributions made to a qualified plan. Plan participants pay no current federal income tax on amounts contributed on their behalf until they begin withdrawals.

Lump-sum distributions may be eligible for favorable tax treatment, such as ten-year forward averaging. Participant contributions made to the plan accumulate income and capital gains, tax-deferred. Tax deferral means that a participant pays no income tax on the interest, dividends, or capital gains earned by the plan until they're withdrawn. These benefits are enjoyed by all qualified retirement plans, including 401(k) plans.

The 401(k) plan offers the additional advantage of allowing participants to reduce the amount of their incomes subject to current federal income tax by the amount deferred to the plan. The ability to reduce their taxable income by participating in salary deferrals can save employees substantial amounts in income taxes each year. There are also important non-tax reasons to establish a 401(k) plan.

Employees have come to view employer-sponsored retirement plans, and 401(k) plans in particular, as a requisite job benefit. This perception allows employers to use the 401(k) plan as an effective means of attracting employees and minimizing turnover. Productivity gains may also be possible in plans that tie employer contributions to profitability.

Contact us to find out more about the 401(k). Our registered representatives are here to help you identify and achieve your financial goals.

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