Key Traits of 401(k) Retirement Plans
| Trait |
Guidelines |
| Tax Benefits |
In most 401(k) plans, contributions are income tax-deductible and grow tax-deferred until withdrawal, when taxes become due, in some newer 401(k) plans, such as Roth 401(k)s, contributions are not tax-deductible but grow tax-free for life (see 401(k) Plan Variations). |
| Eligibility |
Participation is voluntary and must be open to every employee age 21 or older. Most companies impose a waiting period--usually six months to a year--after which you can enroll in the plan. |
| Vesting |
Your contributions vest immediately. Your employer's contributions typically vest over a period of time. |
Enrollment
deadlines |
Plan must be established on or before December 31. you can usually enroll at any time once you become eligible to participate. |
Contribution
deadlines |
Employer must make all contributions by its business tax filing status. Your contributions can be ongoing as long as you're employed with the company. |
Contribution
limits
|
For 2007, you can contribute up to $15,000 ($20,500 if you're age 50 or older). The total contributions to your plan (including both your contributions and your employer's cannot exceed $45,000 for 2007 ($50,000 per year if you're age 50 or older). These limits typically increase each year. |
Contribution
sources |
Pretax or after-tax (Roth) payroll deductions (see 401(k) Plan Variations). |
Withdrawal
penalties |
A 10% penalty applies to withdsrawals made prior to age 59 1/2. Exceptions include death, disability, or rollovers. |
| Rollovers |
Most plans can be rolled over into other retirement plans. |
| Borrowing |
Most 401(k) plans allow participants to borrow from their accounts. |
| Beneficiaries |
Participants can designate primary and contingent beneficiaries. |
Required
minimum
distributions |
In most cases, participants must begin taking a minimum amount of annual distributions after age 70 1/2. |
Fees and
minimums |
Typically participants pay no annual fees. minimums, if any, are determined by the employer. |
