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401k

A retirement plan referred to as 401k takes its name from a portion of the United States Internal Revenue Code. Employees opt to have a portion of their wages paid into a retirement fund referred to as a 401k. Income tax on the money is deferred until the time of withdrawal. Normally the investment funds are placed in shares in diversified mutual funds that balance a mixture of stocks, bonds, and money market positions.

If an employee drawing an annual salary of $50,000 puts $3,000 into their 401k, that person would report only $47,000 in income on their tax return. Calculated by 2004 tax rates for the 25% marginal tax bracket, that amount would represent a tax savings of $750. As an added advantage to 401k plans, the interest, dividends, and capital gains realized from 401k investments are not taxable, thus representing the potential for considerable compound interest growth over the life of a 401k plan.

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