• Roth 401k plans are tax-sheltered accounts.investment image by Kit Wai Chan from Fotolia.com
  
  For-profit employers can create 401k plans as a way to promote retirement savings for their employees. 401k plans allow employer and employee contributions. The plans give the benefit of tax-deferred savings, which means the contributions do not get taxed and the money grows tax-free during the time it remains in the account. Only when account holders take withdrawal is the money included as taxable income.
  
  

Contributions

• 401k plans accept contributions from both employees and employers. Employees make the contributions through payroll deductions, meaning the money comes directly out of the employee's paycheck. Employees cannot contribute more than either the annual contribution limit or their total earned income, whichever is smaller. For 2010, the IRS set the annual contribution limit at $16,500. The IRS permits people age 50 or older to contribute an additional $5,500 for a total of $22,000. These contributions are not included as part of the employee's wages subject to income taxes.
  Employers can also make contributions to the account on the employee's behalf. The contribution cannot exceed the employee's income for the year nor can the total of employer and employee contributions exceed the annual limit, which is $49,000 as of 2010. These contributions do not count as taxable income.
  
  

Investments

• 401k plan contributions must be invested in one of the options offered by the company, unlike IRA contributions which can be invested as the account holder chooses. For example, if the company only offers a certificate of deposit or one mutual fund, the employee cannot designate his contributions to be invested in individual stocks or a different mutual fund. Larger companies typically offer more options because they can afford to pay the costs of additional investment options.
  
  

Withdrawals

• Money in a 401k plan cannot be withdrawn at any time. Qualified withdrawals refer to money taken out after age 59 1/2. These withdrawals may be taken without penalty but are included as taxable income. Withdrawals before age 59 1/2 may only be taken in the event of a permanent disability, separation from the employer, or for a financial hardship. If you leave employment before age 55, you must wait until you are 59 1/2 to take withdrawals without paying a 10 percent early withdrawal penalty. If you leave employment after you turn 55, you can start taking withdrawals without penalty. Examples of financial hardships include buying a home and needing additional funding or funeral costs. Financial hardship distributions get hit with an additional 10 percent penalty on top of income taxes.