401k Rules
- Contributions to a 401k plan may be either voluntary or non-voluntary on the part of the employee. For example, the employer may require that employees contribute at least 2 percent of their income to their 401k, or the organization may not require employees to contribute at all. Employers may opt to adjust non-elective contributions each year as deemed necessary by the organization.
- In most cases, withdrawals, which are also referred to as distributions, may not be made from the 401k account without first meeting specific requirements. According to the IRS website, these include when the account owner, or participant, reaches the age of 59 ½ or if the participation incurs a qualifying financial hardship which merits the allowance of a withdrawal. The worker may also withdrawal funds at the end of employment with the providing employer or upon termination of the plan. The participant may take distributions in a lump sum payment or in installments. Additionally, the participant is required to begin taking distributions from the 401k either at the age of 70 ½ or upon retirement.
- In some cases, a worker may choose to borrow money from his 401k account. This is typically allowable only in the case of an extreme financial hardship, which may not be relieved by any other source. In most cases, the employer does not make a judgment regarding whether an employee's situation meets the requirements of an extreme financial hardship, but must instead rely on a written declaration from the employee stating that a qualifying hardship exists.
- In certain circumstances, a 401k owner may need to move funds from a 401k plan to a different qualifying retirement account or traditional IRA. A "rollover" typically occurs when a worker moves to a new employer. When a worker initiates a rollover, the IRS does not tax the transaction. However, it must be reported to the IRS via Form 1099-R as well as on the worker's tax return.
