What are the rules for 401(k) accounts?


Quick Answer

The most important rules for 401(k) accounts concern taxation and withdrawals. 401(k) contributions are tax-deductible, but withdrawals are taxed as income, the Wall Street Journal explains. Withdrawals before age 59 ½ (age 55 for an unemployed individual) carry a 10 percent penalty.

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Full Answer

All 401(k) plans have contribution limits, but most offer employer matching, according to the Wall Street Journal. The total contribution amount to a 401(k) in any given year is limited, but the limit for owner contributions increases after age 49. Employers may match the owner’s contribution up to a certain salary percentage; all contributions made by the owner until that salary percentage is reached is matched by the employer. Unlike owner’s contributions, the employer’s contributions may not vest immediately; there may be a minimum time with the company required before the funds become available. Employer plans vary, however, and additional rules can apply.

401(k) funds are typically managed by a financial institution and are invested in a combination of securities, states the Wall Street Journal. These institutions keep account owners up-to-date and assist them in handling their account. The investment options offered for a 401(k) are diverse, but usually a variety of mutual funds investing in different types of securities are offered.

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