Definition of "401(k)"

A qualified retirement plan sponsored by an employer that allows employees to defer from income taxation a portion of bonuses and/or salary. Generally the employer will make a matching contribution to the plan. The salary reductions are 100% vested (can not be forfeited). The deferred funds are invested in the plan and the earnings are also deferred from current taxation. Generally the plan has several available options for investing. There are substantial restrictions and tax penalties for withdrawals prior to retirement. If the employee leaves the sponsoring company, the plan can be rolled over to an IRA or, in some cases, to the 401(k) of the new employer. In both cases, there is no tax consequence of the rollover and the plan continues to be tax deferred.