401(k) plan: Section 401 of the federal tax code specified the terms permitting private employees to save cash or to defer profit-sharing funds or funds from a stock-bonus plan tax-free until the cash or funds are withdrawn. In 1978, part k was added to Section 401. Part k allowed private employers to establish an accounting mechanism to deduct an employee's earnings before taxes, and to accumulate those deductions in an account set up for the employee. The employer chooses the investment vehicles offered in the 401(k); the employee selects those that the employer must invest her or his 401(k) funds. The employer defines what makes an employee eligible (with limitations) to participate in the 401(k) and also specifies and makes known whether or not to contribute to the employee pension accounts. The employee's annual contributions are capped at $15,000 per year, or $20,000 (if over age fifty). Withdrawals for “hardship” (the employer defines “hardship” within IRS guidelines) and withdrawals made prior to age 59/2 are charged a tax penalty (because of these restrictions they are sometimes called retirement plans). Many employers match the contribution made by the employee, but do not contribute if the employee does not contribute. For-profit employers provide 401(k) plans.
403(b) plan: Employers that are not-for-profit organizations provide 403(b) plans, which were allowed in the tax code in 1958, and are similar to 401(k)s. The eligible employers are organizations that are tax-exempt under IRC 501(c)(3), and employers in public educational organizations: including colleges and universities, independent schools, research organizations, teaching hospitals, churches, charitable organizations, public teaching institutions, such as state universities and community colleges, and K–12 public school systems. Retirement plans set up under section 403(b) generally operate as defined contribution plans, in which, most of the time, the employer can contribute a percentage of participating employees' compensation each year.
Annuities: A contract between an individual and a financial institution specifying that in exchange for payment (it could be in the form of a single payment, referred to as a lump sum, or it could be a series of payments) to the