401k Plan Facts

• A 401k is an employer-sponsored retirement plan designed to allow employees to postpone receiving wages.  Instead, the deferred wages go into an account to be invested and received at a later date, usually retirement.
• The maximum annual 401k contribution by an employee is $16,500 for 2011. 
  
• The maximum annual 401k contribution by an employee is $17,000 for 2012.
  
• Since amounts contributed to a 401k are not taxed, ALL amounts that come out of the 401k account will be taxed at ordinary income tax rates.
• The general age at which 401k accounts may be accessed without penalty is 59½.  Before this age, penalties will normally be due when premature withdrawals are made.  A premature 401k withdrawal tax generally is made up of two parts:
• Ordinary Income Tax.  The amount withdrawn is included on your 1040 tax form as income.
• 401k Early Withdrawal Penalties.  An additional 10% penalty will generally be paid by the account-owner.
• Funds may be borrowed from one’s 401k account.  401k loans will be paid back with interest (to the owner’s account).
• Investment choices may be made with the funds once inside the account.  Mutual funds and company stock are generally the investment vehicle of choice for 401k plans.
• Roth 401k plans allow for “after-tax” contributions into the account.  This means that all employee contributions have been taxed before entering the account.  Assets later withdrawn are generally withdrawn tax-free.
• Often, employees may receive a 401k match.  A 401k match is the employer’s contribution into the employee’s account.  The 401k match funds may be restricted by the employer for a certain period of time as the funds vest.  Not all employers offer a match, nor are they required to do so.  Also, sometimes 401k matches are immediately vested to employees.
  
• Also, profit sharing plans may be offered in conjunction with a 401k plan.  Employers are not required to contribute every year, even if a profit sharing plan is offered.  Profit sharing funds may be restricted as an employee vests over time.
• 401k contributions are not tax deductible at the end of the year, per se.  Instead, contributions essentially reduce the employee’s income with each contribution, thereby reducing required Federal income tax at the end of the year.
• 401k funds may be rolled over after termination of employment.  Funds generally can be rolled into other 401k’s, 403b plans, 457 plans, or traditional IRA’s.  When possible, a 401k to IRA rollover generally makes the most sense.
• 401k catch-up contributions are available to persons age 50 and older.  Additional 401k catch-up amounts available are $5,500 for 2011 and 2012.