A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. Some of the key features of 401k plans are:

• Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals).

• Employers can contribute to employees’ accounts.

• Distributions—including earnings—are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).

In Iowa, as in other states, a 401(k) plan is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. The contributions made by employees towards a 401(k) are not taxed until the employee withdraws that money, typically after retirement. This deferral of taxes on both earnings and contributions is a key feature of the 401(k) plan. Employers may also contribute to the plan by matching a certain percentage of the employee's contributions or by adding funds through non-elective contributions. When an employee eventually takes distributions from the plan during retirement, those distributions are treated as taxable income. However, if the contributions are made to a Roth 401(k), the distributions may be tax-free, provided they are qualified distributions. The specific rules and regulations governing 401(k) plans are established by federal law under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, and while the state of Iowa may have its own tax implications for retirement income, the primary regulation of 401(k) plans is at the federal level.