How To Understand 401k Rules

A 401k is a personal retirement savings account that is governed by strict rules set up by the Internal Revenue Service.  When considering participation in a 401k plan, it is important that you understand the rules governing this type of account.  This type of savings plan also has an administrator who sets up basic rules of how the plan operates.  Basic operations can vary, but the governmental rules are law and do not change.

The law allows you to make contributions to your 401k account that are tax deferred up to a certain dollar amount in a one-year period. These amounts vary from year to year, so be sure to check and see what the is at the beginning of each year.  You are not taxed on the allowed deferred amount until you withdraw your money.  Your employer will deduct weekly contributions from your paycheck, and some even match a certain percentage of your contribution.  You will want to know these things when considering how much to put in.

Most 401k accounts do allow you to take loans against the funds which they are holding for you.  The rules for loans are set by the administrator of you particular plan.  You will want to fully understand how your 401k works, if you are considering taking a loan.  The plan administrator usually allows loan repayments to come from your paycheck on a weekly basis.

There are many investment options within the plan for you to consider.  Most plans have short-term, long-term, as well as low and high-risk options.  You will want to make sure that you study the options to find the portfolio that is best for your individual needs.  Remember, you are trying to put aside a nest egg for when you are ready to retire.

Withdrawals from 401k accounts can be made once you reach 59 and 1/2 years of age.  At that time you will pay income tax on the amount that you take out each year.  The law prohibits early withdrawal of funds.  If you withdraw your funds early, you will have to pay a penalty to the Internal Revenue Service of 10 percent, as well as tax on the amount withdrawn.  This is a hardship withdrawal and must be accompanied by documents to prove that you meet the government rules for hardship withdrawal.

You may be able to take a 50 percent withdrawal to purchase your primary residence.  Check your plan rules to see if it allows for this.  Any withdrawals must be made after all available loans have been executed.  Available funds are reduced by the amount of all outstanding loan balances.  It is important to understand the rules of your 401k.


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