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 Illinois, 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 their 401(k) are not taxed until the employee withdraws that money, typically after retirement. This tax deferral is the primary benefit of a 401(k) plan. Employers may also contribute to the plan by matching a portion of the employee's contributions or by making non-elective contributions. The earnings in a 401(k) plan are not taxed until the employee takes a distribution. In the case of a Roth 401(k), contributions are made with after-tax dollars, and qualified distributions during retirement are tax-free. The specific rules and regulations governing 401(k) plans are established by federal law, particularly the Internal Revenue Code, and are not significantly altered by Illinois state law. It is important for individuals to consult with an attorney or a tax advisor to understand the specific implications of participating in a 401(k) plan, including contribution limits, distribution rules, and the tax consequences of early withdrawals.