Now that you’ve started your new job, the Human Resources Department has most likely mentioned your 401k plan to you. But if you don’t understand all the regulations that are associated with the account, now is a good time to go over some 401k rules.
Your 401k is a tax-deferred account that is sponsored by your employer. This is an investment account that allows you to deposit a portion of your wages into the account each time you are paid until you reach the age of retirement. Your employer will match your contributions up to a certain percent of your salary, so that you’ll have a substantial amount saved up for living expenses when you are no longer working.
You’ll need to understand 401k rules concerning your wages before you start depositing into your account. Your 401k deferred wages are not counted as part of your taxable income, so you don’t have to report them on your 1040. But, when it’s time for you to start receiving social security or Medicare benefits, the wages you have placed in your 401k account will count toward these services.
There is also a maximum amount of money you can deposit into your account during the year. The 401k rules state that during the year 2009, the most that an employee can deposit into an account is $16,500. If you’re 50 years of age or older, you can make some catch-up contributions to the account as well, but the amount can’t exceed $5,500.
If you happen to change employers while your 401k has already been started, you can move the funds into a new account that is sponsored by your most recent employer. A check will be sent to you from your former place of work for you to deposit into the new account, but you’ll need to make the transaction within 60 days of receiving the check so that your money can continue to grow.
When you’re ready to start withdrawing money from your account, 401k rules state that you have to be at least 59 1/2 years of age to take the money out without a penalty. If you have to take out any amount of money before you reach that age, you will be charged a ten percent penalty. Once you reach the age of 70 1/2, you’ll need to make regular withdrawals from your account, and there is a required minimum for withdrawal. These withdrawals will be taxed at your current rate.
To get more information on 401k rules, be sure to talk to your employer in detail about the benefits that are specific to the company.
