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In a 401(k) plan, an employee of a company is allowed to contribute an amount up to an annual maximum (which is adjusted for inflation), currently $9,500. This portion of the employees salary is not taxed (except for Social Security Taxes) and is treated as a reduction in salary. The company may elect to match a portion of the savings. The limit is the lesser of $30,000 or 25% of an employee's compensation.

Well, what's so great about a 401(k) plan? First, the income on these savings accumulates on a tax-deferred basis until it is withdrawn. Funds can then be withdrawn after the individual reaches the age of 59 and 1/2 (but you don't have to until the individual is 70 and 1/2). This is attractive since you will more than likely be passed your prime earning years and you may be taxed at a lower rate.

Second, there is a provision in the tax law that allows an individual to take a loan against their 401(k) fund balance. The loan is limited to the lesser of $50,000 (reduced by the employee's highest loan balance during the past 12 months) or 50% of the present value of the employee's vested interest in the plan -or- $10,000 whichever is greater. Any interest that you pay against the loan is tax deductible and is added to the fund balance (so you are in essence borrowing from yourself). All loans must be paid back within 5 years, with the exception of loans used to purchase a home.

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