A 401k or 401(k) plan is a plan that allows U.S. workers to save for their retirement. One of the primary
benefits of a 401k retirement plan is that investments into the plan are tax deferred. That means the
earnings you contribute to a
401k plan are not taxed until they are later withdrawn. You can’t simply
invest and withdraw from a 401k at will. Instead, you must follow the 401k rules set forth for these plans.

Contributing to Your 401k

There is a federally-mandated maximum contribution limit for 401k plans. In 2010, the 401k limit remains
$16,500. This is the maximum amount you can contribute to your 401k plan if you are under age 50. If
you turn 50 during the calendar year, you can make a catch-up contribution of $5,000.

You can only contribute to your 401k through payroll deduction. You’re not allowed to invest in your 401k
any other way.

Employers are allowed to contribute to your 401k plan on your behalf. Many employers have a matching
program where they contribute a certain amount that is based on your contribution. For example, your
employer may match your contributions by 50%. So, in that case, if you contribute $500 a month, your
employer would contribute $250.

Although income contributed to your 401k is not federally taxed until it is
withdrawn, it is subject to several other taxes including social security,
Medicare, and federal unemployment taxes.

401k Withdrawal Rules

To withdraw from your 401k without receiving a penalty, you must wait until
you are 59 1/2, with some exceptions. If you retire or leave your company
before age 59 1/2 but after age 55, if you become disabled, or if you meet
your employer’s hardship qualifications you are able to make a
401k withdraw without receiving a penalty. Withdrawing from your 401k in
other circumstances results in a 10% penalty. You’ll also face income taxes
on the amount you’ve withdrawn.

If you’re eligible for withdrawal, you can take a
lump sum distribution minus
a 20% IRS mandatory withholding amount. You can also withdraw the
money to place it into another retirement account.

After you reach 70 1/2 or you retire, you must begin taking the required
minimum distribution (
RMD) from your 401k plan. If you don’t take out the
RMD, you face a penalty from the IRS.

401k Rules on Loans

Some 401k plans allow you to borrow money from them. Those plans that
do allow 401k loans, limit the loans to 50% of the vested balance or
$50,000. Generally, 401k loans have to be repaid within 5 years. You may
take more time to pay your loan if it was used to purchase the home you
currently reside in.

You can only have $50,000 in outstanding
401k loans at any given time. So,
if you need to borrow again after taking out a first loan, the maximum loan
amount is reduced by your current loan. Additionally, you must take out the second loan within 1 year of
the previous loan.

If you leave your company, regardless of the reason, you will have to repay the outstanding 401k loan
balance in full within 60 days. If you don’t repay, the remaining balance will be subject to the 10% early
withdrawal penalty. Similar 401k rules apply if you default on your loan payments.

401k Rollover Rules

When you leave your job, you’re able to do what's called a 401k rollover into your new employer’s 401k
plan, or into another retirement account like an
IRA account. You typically have a certain amount of time,
like 60 days, to deposit your 401k funds into a new account before you face an early withdrawal penalty.
If you don’t have your 401k directly rolled over into your new account, and instead receive the withdrawal
yourself, you will have 20% of the withdrawal withheld. Even though part of your withdrawal is withheld,
you still have to deposit the full amount of previous 401k investment into a new account. That means you
must come up with that 20% from another place.

More Information on the 401k Rules

If you have questions about your 401k plan and the rules you’re required to follow, talk with your 401k
plan administrator. Your manager or human resources contact may be able to help you locate your plan’s
Copyright © 2011 The Money Alert.com. All rights reserved.
All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to
participate in any particular trading strategy. The Money Alert does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any
information prepared by any unaffiliated third party, whether linked to this web site or incorporated herein, and takes no responsibility. All such information is provided solely for
convenience purposes only. The Money Alert is not affiliated with any of the firms or entities listed unless specifically stated. The Money Alert does not provide investment, tax or legal
advice. Please consult the appropriate professional regarding your personal situation.
401K Rules
There are a number of 401k rules that must be followed
when dealing with your 401k plan. 401k rules apply to
contribution limits, loans, rollovers, withdrawals, and
more. So, it's important that they are handled properly.
401k Rules