what is a 408 k plan 
the term 408 k account refers to an employer sponsored retirement savings plan a 408 k plan allows employees to put aside pretax dollars for retirement that grow on a tax deferred basis making it a type of individual retirement account ira this means that individuals pay taxes when they make withdrawals after they turn 59 the 408 k is commonly referred to as a simplified employee pension sep plan in fact it is the sep version of the popular 401 k plan understanding 408 k planssection 408 k of the internal revenue code irc outlines the rules and regulations associated with sep and salary reduction simplified employee pension sarsep accounts notably individual retirement accounts iras or individual retirement annuities that is why sep plans are often referred to as 408 k plans 1the irc highlights the requirements needed in order to participate in a 408 k plan plans are available to small businesses of any size and to self employed individuals participants qualify if they are annual employer contributions cannot exceed the lesser of 25 of the employee s pay or 61 000 for 2022 66 000 for 2023 the annual compensation limit cannot be calculated on incomes exceeding 305 000 for 2022 330 000 in 2023 the maximum deduction claimed on a business tax return for contributions is the lesser of the total contributions into employees accounts or 25 of compensation 2plan holders can make withdrawals from their 408 k plans at any time the same way they would from traditional iras but there are certain conditions that apply for instance most individuals make withdrawals after they turn 59 any distributions from these plans before that age incur a 10 early withdrawal penalty 2 withdrawals must be made as required minimum distributions rmds as of april 1 the year after you turn 72 if you reached that age on or before dec 31 2022 3 you must begin taking rmds if you turn 73 on or after jan 1 2023 4unlike traditional retirement plans seps don t have the same start up or administrative costs 56408 k plans vs 401 k plansas noted above a 408 k is one type of employer sponsored retirement plan the 401 k plan is the most common option and is offered by the vast majority of american corporations the plan allows taxpayers to make pre tax contributions through automatic payroll deductions and employer matches for those that make them 7plan reform has made several changes to benefit employees including lower fees and investment options the average 401 k plan now offers over two dozen investment options by balancing risk and reward in accordance with an employee s preferences 8 unlike an sep employees may contribute to a 401 k plan 9 a solo 401 k plan is also available to self employed individuals or couples with the same total contribution limits as an employer sponsored plan participation in traditional 401 k plans continues to grow these plans held roughly 6 3 trillion in assets by september of 2022 which represented more than half of the retirement market in the united states 10 there were 625 000 active plans in the country with a total of 60 million former employees and retirees at the end of september 2022 here are a few other facts related to the 401 k that taxpayers should know correction jan 27 2023 a previous version of this article misstated that 408 k plans are available to companies with 25 employees or less it was corrected to state that plans are open to companies of any size 