401k Rules

Tax benefits

  • In most 401(k) plans, contributions are income tax–deductible and grow tax-deferred  until withdrawal, when taxes become due.
  • In some newer 401(k) plans, such as the Roth 401(k), contributions are not income tax-deductible but the assets in the plan grow tax free for life.  (for more 401k info see glossary )

Eligibility

  • Participation is voluntary and must be open to every employee age 21 or older.
  • Most companies impose a waiting period—usually six months to a year—after which you may enroll in the plan
  • Your contributions start vesting immediately
  • Your employer’s contributions typically vest after a set period of time  

Enrollment deadlines

  • The employer must establish the plan on or before December 31st
  • You may usually enroll at any time once you become eligible to participate

Contribution deadlines

  • Employer must make all contributions by the business tax filing date  
  • You may contribute for as long as you’re employed by the company

Contribution limits

  • For 2008, you can contribute up to $15,500 ($20,500 if you’re age 50 or older)
  • For 2009, you can contribute up to $16,500 ($22,000 if you 're age 50 or older)
  • For 2010, the contribution limits are the same as 2009
  • The total contributions to your plan (including both your contributions and your employer’s) cannot exceed $49,000 for 2009 ($54,500) per year if you’re age 50 or older)
  • For 2010, total contributions to your plan are the same as 2009 
  • These limits typically increase each year.

Withdrawal penalties

  • A 10% penalty applies to withdrawals made prior to age 59 ½
  • Exceptions to the withdrawal rule include death, disability, and  rollovers

Rollovers - Most plans can be rolled over into other retirement plans

Borrowing -  Most 401(k) plans allow participants to borrow from their accounts.

Beneficiaries - Participants can designate primary and contingent beneficiaries for their 401(k) plan

Required minimum distributions - In most cases, participants must begin taking minimum annual distributions
After age 70 ½

Fees - Fees and expenses vary from plan to plan and can have a significant impact on investment returns