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It's Important To Understand The 401k Rules When Planning For Retirement

February 28, 2012 | Comments: 0 | Views: 151

401k(s) have been growing in popularity in the US as more Americans realize that the days are numbered for defined benefit pensions paid by employers. American workers now have more control on how they save up for their retirement and how the money is invested. However, along with this freedom comes a certain level of responsibility. The first thing to understand about 401k plans is that there are certain rules that must be followed. These rules guide the way funds are contributed, invested and withdrawn. There are also rules for dealing with 401k loans and rollovers.

Withdrawal Rules

Workers are not allowed to withdraw funds from their accounts until they are fifty-nine (59) and half (1/2) years old. Any worker that violates this rule will receive a penalty. However, a worker will not receive a penalty if they fall under the following groups of people that have been exempted from this rule.

* Disabled workers * Workers that meet the hardship qualifications set by their employers * Individuals that retired from or left their job when they were above fifty-five years.

There is a 10% penalty and deductible income tax on withdrawals for people who fail to abide by the withdrawal rules.

Contribution Rules

There is a limit imposed by the federal government on the amount a worker can contribute to his/her 401k account. This limit is reduced a bit depending on the age of the employee. It could also fluctuate. As of 2010, workers under fifty years can contribute up to $16,500 and no more than that.However, they could make an additional $5,000 investment by the time they are fifty years old. As for the methods of investment, only payroll deduction is allowed. Employers can do this on behalf of the workers sometimes through a matching program where they contribute a certain percentage of the total contribution from the salaries of workers.

401k Rules Concerning Loans

It's imperative to note that not all 401k plans allow borrowing. So workers should select the right plan for themselves based on this fact. For plans that allow borrowing, the sum of the total loans taken at any time must not exceed 50% of the balance or $50,000 and this amount reduces after each subsequent loan. For example, if an employee borrows $30,000, the limit will become $20,000. A second loan must be taken within a year of the previous loan and the total sum must be paid within five years with only one exception - if the loan was used by the employee to buy their current residence - in which case the time limit will be extended. When a worker forfeits his/her job or leaves the company, he/she will be given 2 months (60 days) to pay their loan. Failure to abide by any rule mentioned above attracts a 10% penalty on the money left in the account.

Rollover Rules

Rollover rules only apply to people who switched jobs and wish to do a rollover into their new employer's 401k plan. Up to 60 days is given to transfer funds from the previous account to the new one. Failure to transfer the funds within that period will attract a 10% penalty. When employees receive the withdrawal instead of doing a direct rollover, part (20%) of the total sum will be withheld. The workers would still be required to transfer the full amount. In other words, they will replace the withheld amount with their own money. That money can come from anywhere except their 401k account.

These are the main rules associated with 401k(s). Anyone who meets the basic requirements and can follow these rules can start contributing to their company sponsored 401k plan.

For more information on all the 401k contribution limits as well as the 401k loan rules please visit our informational website. By learning more about your 401k options and how they work, you can often utilize your 401k for more than just a basic retirement plan.

Source: EzineArticles
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