Understanding 401k Laws and Regulations

Understanding 401k laws and regulations and how they work is going to be important if you plan on using this type of account for your retirement planning. The 401k system is highly regulated by the IRS and you will need to make sure that you stay within the rules when using it. Here are the basics of 401k laws and regulations and how you can work with them.

Eligibility

In order to get involved with a 401k, you are going to have to meet some eligibility requirements. Every employer is going to have different eligibility requirements that must be met. Sometimes, you will have to meet a minimum age such as 18 years old to participate. Other times, you will have to work for the company for least one year before you can join. Some companies use a total hour requirement that must be met. In order to determine when you can join up, you need to check with the rules that were set forth with your individual employer.

Contributions

With the 401k account, there are two different types of contributions. First of all, you will be able to contribute money to the account. Secondly, your employer can also contribute money to your account. As far as your contributions go, you can contribute a maximum of $16,500 per year. Once you reach the age of 50, you will be able to make catch-up contributions. This allows you to put away as much as $22,000 per year. Your total contributions between you and your employer cannot exceed 100 percent of your annual salary. When it comes to your employer, they will get to decide what percentage of your annual salary they are going to contribute. Between you and your employer, your contributions cannot exceed $49,000 for the year. 

Taxes

Whenever you make contributions to a 401k, you are going to do so on a pre-tax basis. This means that you can decide what percentage of your income is going to be deducted from your paycheck. This money will then go into your account without being taxed. You will be able to use that money to invest in different securities such as stocks and bonds. Any money that you make from returns on these investments is going to be allowed to grow tax free as well.

Withdrawals

You will not have to pay any taxes on the money in your account until you withdraw it. You are eligible to start taking withdrawals from your 401k account once you reach the age of 59 1/2. At that point, any money that you take out is going to be taxed as if it were regular income.

Early Withdrawals

If you take any money out of your 401k before you reach the age of 59 1/2, you are going to have to pay a 10 percent early distribution penalty. In addition to that, the money will be treated as income and you will have to pay income taxes on it.

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