401k Rules for Contributing and Investing

Understanding your 401k rules can make saving for retirement much less confusing. There are several rules about contributions and investing that you will want to keep in mind. Here are a few things to consider about 401k contribution and investment.

Contribution Eligibility

In order to contribute to a 401k, you will have to meet certain eligibility requirements. In most cases, you will need to be at least 21 years old in order to contribute. In addition to that, most businesses will require you to work for them for at least one year before you can set up an account and contribute. As long as you meet those requirements, you should be able to start saving through a 401k.

Contribution Rules

When you set up a 401k, you will be able to contribute a certain percentage of your salary to the account. Your employer will automatically deduct this amount from your pay before you are issued a paycheck and before taxes are calculated. In most cases, you will be able to contribute up to a maximum of 15 percent of your income into the 401k. You will need to check with your employer to see what the exact percentage they allow is. You can choose whatever percentage you want to save as long as it is below the maximum percentage that your company allows. Many experts believe that you should contribute at least 10 percent of your income to this type of retirement account to ensure that you have enough money to retire on. 

Maximum Contributions

Each year, you have a maximum amount of money that you can contribute to your retirement account. As of 2010, you can contribute as much as $16,500 to your account each year. Starting in 2011, the government will adjust this amount for inflation by increments of $1000. Therefore, as inflation increases, you will be able to contribute even more money to your retirement account.

Catch-Up Contributions

After you reach the age of 50, the government allows you to make catch-up contributions to your account. Since many people get started saving for retirement later in life, this can be a great way to get more money into your retirement account quickly. As of 2010, you can contribute $22,000 per year with this catch-up contribution.

Employer Contributions

In addition to your personal contributions, your employer can contribute to your account. The employer can choose how much to contribute to your account. However, they have to stay within certain contribution limits as well. Between your employer's and your contributions, you cannot exceed 100 percent of your annual salary. In addition to that, your employer has to stay under $49,000 per year in contributions to your account.

Investing

When investing your funds, you will have to invest in securities that are on the approved list for your 401k provider. Most of the time, this will involve investing in mutual funds, stocks and bonds. You can invest all of your funds in the account if you want, or you can keep some funds in cash equities if you desire.

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