401(k)
Understanding the 401(k) Retirement Savings Plan:
A 401(k), formally known as a Cash or Deferred Arrangement (CODA), is an optional retirement savings plan where individuals can set aside money for their retirement. This involves deducting a portion of income from each paycheck before taxes and placing it into a designated account, which remains untouched until the employee reaches retirement age. For PERA members, the 401(k) is offered through the Voluntary Investment Program (VIP). The current annual maximum contribution is $10,500 or 23% of eligible income, whichever is less (subject to annual adjustments). As an example, if an individual like John designates 12% of their gross earnings to be deducted for the 401(k), they only pay taxes on the withdrawn amount at the time of retirement. The funds in the 401(k) account are then invested in various interest-accruing funds.