Q:

What are general 401(k) rules and regulations?

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Quick Answer

Distributions from 401(k) plans are bound by rules regulating the ages at which plan holders may or must take funds. For example, payments must start no later than April 1 of the year after the plan holder reaches age 70 1/2, whether or not he has retired, states the IRS.

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Full Answer

Distributions of 401(k) retirement benefits typically cannot start until the plan holder reaches the age of 59 1/2, has a financial hardship, dies, becomes disabled or otherwise is no longer employed, according to the IRS. A plan holder who is under age 59 1/2 may take distributions if his 401(k) plan ends and no rollover plan has been established. Early withdrawals may result in additional income tax or penalties.

Exceptions for early withdrawal are made in cases of immediate financial need, notes the IRS. Examples include costs associated with the purchase of a primary home, funeral expenses, postsecondary education costs, medical expenses and payments to prevent eviction from or foreclosure of a primary residence. Hardship distributions may not exceed the amount of funds available in the employee's elective deferral. The amount may not exceed what is needed to mitigate the hardship, but it may include anticipated taxes.

When a 401(k) plan is terminated, a plan holder may roll the funds over to another qualified plan to avoid paying income taxes on the distribution. The plan holder must include any funds that are not rolled over as taxable income on that year's federal income tax return, instructs the IRS. If a 401(k) distribution is paid to an account holder instead of rolling over to a qualifying plan, a mandatory 20 percent is withheld for taxes regardless of whether the recipient intends to transfer the funds to a new 401(k) plan or an Individual Retirement Account at a later date.

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