Module 6d: Investment Decisions
Lisa works for an employoer who has a 401(k) plan. This type of plan is the most well-known
of all "defined-contribution" plans. The amount that an employee contributes each year is
not subject to income tax, and earnings on the contributions grow tax-deferred until the
employee retires and begins withdrawing from the account. When employees retire, the amount they
withdraw is subject to income tax. Plans have regulations on eligibility and withdrawls.
Many employers "match" the contribution of an employee up to some limit.
Who makes the decision about how Lisa's savings are invested?
Lisa. She will be able to choose from the investments selected by the employer. A typical plan
has 7 or 8 choices. These usually consist of mutual funds ranging from low risk to more risk.
If Lisa worked for a not-for-profit employer, it is possible that the employer would sponsor a
403(b) salary-reduction plan that is similar to a 401(k) plan. State and local government employees
may contribute to "457" plans that are similar to a 401(k) plan.
- Ask your employer what type of plan is available.
- Find out if you are eligible to participate.
Module 6 - Module 6a | Module 6b | Module 6c | Module 6d | Module 6e