Starting a 401k plan is obviously very advantageous in terms of the tax benefits it provides, but it is a very attractive option for other reasons as well. Although employers are not obliged to contribute to the funds of their employees, many do offer to match contributions, as part of a package of employment benefits. This greatly increases the final retirement amount available to the investor. In addition, the growth of the fund is tax deferred, and employees have a great deal of control over the types of asset in which their funds are invested, according to how risk averse they are. Another benefit is that the plans are portable, that is, employees can take at least their own portion of the plan with them when they move companies.

The reason that 401k plans were created was to ensure employees had reasonable financial provision for their later years. Ideally, therefore, the money in the fund should be left alone till retirement. However, the government recognizes that in the real world, there are going to be times when you have a desperate need for a cash sum and you have no other option but to draw on your retirement savings. The government has therefore drawn up 401k withdrawal rules, to clarify the circumstances under which investors may be able to legally withdraw their funds.

The overriding principles of 401k withdrawals are first and foremost that the sums withdrawn from them are classed as income, and thus are subject to tax. The reason for this is that the original contributions were made on pretax income, and the investment growth is tax deferred. Second, if the employee makes the withdrawal before reaching the age of 59 and a half, this is classed as early withdrawal and is subject to stringent hardship rules. There are two kinds of 401k hardship withdrawal: financial and non financial.

A 401k hardship withdrawal of the financial type can be made if you find yourself subject to an urgent and immediate financial emergency, and you can demonstrate that you have no other way of meeting this commitment. Such emergencies could include imminent eviction from, or foreclosure on, your primary residence, or medical expenses which will not be refunded. An emergency could also include a simple inability to make ends meet on your current available income. You need to specify the precise amount which is required, for instance to prevent home foreclosure, and the withdrawal may not exceed this amount.

A 401k hardship withdrawal of this type is subject not only to the 401k early withdrawal tax, but to the 401k withdrawal penalty as well. Amounts withdrawn cannot be returned to the fund at a later date. Once withdrawn, the money has to be used for specified purposes, mainly to meet the emergencies which were conditions of the withdrawal being allowed, such as preventing home foreclosure or meeting emergency medical expenses. However, it can also be used for college expenses for a child, or as a 401k withdrawal for home purchase.

A 401k hardship withdrawal for non financial reasons is still subject to tax, but not to the 10 percent penalty. You can qualify for early 401k withdrawal without penalty if you meet certain conditions, one of which is a complete and permanent disability. You can also qualify if the amount you owe for your medical expenses comes to more than 7.5 percent of your gross income, or if a court has directed that you hand over the money to a divorced spouse, or to a child or other dependant. In addition, you can withdraw your funds without penalty if you leave your employment permanently in the year you turn 55 or later, whether you are terminated or laid off, resign or take early retirement.

Another way you can take a 401k withdrawal without penalty is if you immediately transfer the cash into another qualifying retirement plan, such as IRA. This is called a rollover and it must take place within 60 days of withdrawing. You can do this without penalty because the money is still serving as provision for your retirement. Payments from the fund made to your estate or your beneficiaries after your death are also not subject to penalty.

One possible way in which you withdraw your 401k money without either tax or penalty is by taking out a 401k loan, that is, borrowing against the funds in your plan. Employers are not obliged to offer this facility, and those who do will usually impose restrictions, including a minimum balance such as $1,000. Generally, you can take up to 50 percent of your vested account balance (the vested balance is the percentage to which you have built up a permanent entitlement, even if you leave the company) up to a maximum of $50,000. It must be repaid within 5 years unless it is for a home purchase, in which case a longer period is allowed. Interest is payable, but as it goes back into your fund it still benefits you, unlike paying interest to a bank.

Once you pass the age of 59 and a half, your 401k withdrawals count as retirement benefits and so are not subject to penalty, though they are still taxed as part of your normal income. You are not required to make any withdrawals, or distributions, until you reach 70 and a half, after which you have to take at least the required minimum by April 1st of the following year at the latest, and then annually by December 31st of each year. You should therefore take your first distribution earlier than April, to avoid paying tax on two in the same year.

There may sometimes be no alternative to early withdrawals from 401k funds. However, they should be avoided if at all possible. Not only do they attract penalties, but you lose out on all the growth which the amount would have generated. Withdrawing is a major decision and you should always discuss it with a financial adviser, to ensure you understand the 401k withdrawal rules, and that you have explored all the options.

Most plans are participant-directed where the employee selects from a number of investment options. Usually the employee is able to re-allocate money between the investment alternatives any time. The name “401(k)” originates from the reference to the Internal Revenue Code section 26 U.S.C. § 401(k).

There are limits on contribution to the 401k plans from both the worker and the employer per year. Maximum limit on a total employee pre-tax deferral for that year is known as the “401(k) limit”. The 401k limits, changing each year to account for any inflation, were $15,500 for 2008 and increased to $16,500 for 2009 and 2010. For future years, it may increase in increments of $500. Additional pre-tax catching up contributions are allowed for workers 50 years or over. These were $5,000 in 2008 and $5,500 in 2009. Future “catch up” contributions could also get adjusted for inflation with $500 increments.

Employee’s contribution can be allocated as pre-tax contribution, after tax Roth contribution or combination of both, if the selected plan allows for it. Only condition is that the total 401(k) contributions should be under the “401(k) limit”. April 15 of following year is the deadline for withdrawing any excess funds. If this is not done, the employee will pay taxes on the excess and appropriate penalties. There are limits on the employer contributions as well. When added to worker’s contribution the total cannot exceed section 415 limits. This equals to whichever amount is lesser out of 100% of worker’s compensation or $49,000 in 2009. Employer matching contributions can be made on behalf of the selected Roth contributions, however the employer match must be made on a pre-tax basis.

401k plans and limits are applicable only to wage earners and non-government employees. Governmental employers in US cannot present 401(k) plans to their employees unless established before May 1986. Instead, they need to set up a section 457(g). Also, if you are an independent entrepreneur or self-employed person, self employed 401(k) plans are for you.

Because of Economic Growth and Tax Relief Reconciliation Act (2001), solo 401(k) plans came into being to aid independent entrepreneurs in retirement planning. Self employed 401(k) plans are meant for any solo operator. These include business owners, freelancers, sole proprietors, independent contractors and folks in company, corporation or partnership with limited liability. Higher extremity of the self employed 401(k) limits is determined by organization/business type. The amount fluctuates yearly, similar to 401k limits for wage earners. Self-employed persons could contribute up to $49,000 in 2009 while those over 50 could nominate up to $54,000.

If you have had several jobs that each had their own 401k, moving your accounts to and individual IRA can make management of your funds easier and more convenient. Instead of having multiple accounts and investment options to track you can manage all of your money in one account. Having all of your retirement funds in a single place can also help you balance your portfolio for your individual needs. What you need from your retirement funds varies according to you age. If you are younger, you may wish to take more risk to try and grow your money more quickly. If you are close to retirement age, less risky investment may be your preferred option. When you have all of your money in one place it is easier to allocate your assets according to individual requirements.

A 401k rollover into an individual account may also reduce your expenses. While not all 401k accounts have high expenses, may do. Rolling over your 401k may also give you the option of investing in a self-directed brokerage account. This gives you maximum control of your investments since you are not limited to the investment options provided by your employer. By choosing how you invest your funds you can direct reduce your expenses and invest according to your personal risk tolerance.

Rolling your funds over into an individual IRA can also protect you if your former employer faces financial issues, merges with another company or changes the parameters of their 401k account in ways you did not anticipate.

To rollover the funds in your 401k to an IRA account you need to perform three easy steps. First you need to set up an IRA account at your bank, credit union, brokerage firm or other financial institution. Most financial institutions are happy to help you fill out the required paperwork. Next you need to inform your employer, or former employer about the details of the transfer. Be sure that the employer makes out the check to the financial institution where you have set up your IRA. This is known as a trustee-to-trustee transfer and will ensure the avoidance of the 20% automatic withholding. After the transfer is complete you will need to begin investing your money.

A 401k rollover to an IRA account is very often your best option. You will enjoy greater convenience in managing your account as well as an increase in investment options.

Anyone will likely fear what the future may bring. Retirement is the time when you will no longer render service to anyone and to any company. At the same time, no fixed monthly salary will be given to you. Who seems to be on the losing end? Isn’t you? Therefore, it is high time for you to ponder on what you are to do and how you are to spend your retirement days. Are you going to allow yourself to be confronted with the dreadful financial dilemma? Surely not.

The Retirement Plan to Benefit the Individual Employees

401k retirement plans are generally offered by the employers. In a matter of a certain period, you should contribute a portion of your salary to let the funds under your name accumulate. However, it is not at all times beneficial to rely on the employer’s 401k retirement plan offer. How about if you encounter the same circumstances as mentioned above? How about if you move on to another location and to another job? You will have to go through a series of procedures just so you can claim your money. Everything is going to be smooth if you go for a self-directed 401k retirement policy.

The Solo Retirement Account as an Advantage to an Investor

Being a full-time or a part-time investor on any business allows you to manipulate the proper phasing of your retirement. And since you are involved in the investment industry, it is just proper to devote some money as a guarantee that during your retirement days you are not going to be eaten up by poverty.

The self-directed 401k gives you the opportunity to assume the role of an investment superior. Apart from the common no-load mutual funds, bonds, stocks, options, and many more, your choices have been extended towards the deeds of trust, real estate investment, tax liens certificates, commercial paper, mobile and homes rental, forex, business equipment leasing, limited partnerships, and many more.

It is through the self-directed 401k that you are given the freedom to let your investment grow at the maximum in time for your retirement.

I’m sure you have heard about the traditional or conventional 401(k) plan and a Roth 401(k) plan. Have you done some readings about these subjects? Are you aware of their background or even the simplest definition? If yes, but you have just a small understanding about these and are still interested in knowing more, or if you don’t have any idea about such plans, we’ll discuss a very simple definition of each so that it will be very clear for you.

The 401(k) plan is a retirement savings plan, a traditional one actually, and it was authorized, introduced and approved by the United State Congress in 1978 under Internal Revenue Code section 402A in which it states that employees or workers can make a payment or contribute pre-tax earnings to the 401(k) or retirement plan. These pre-tax earnings that are paid by employees were put to one side or one special account by their employers and the money can be invested in different or various options that is available on the retirement savings plan. Take note also that pre-tax earnings are called elective deferrals.

On the other hand, Roth 401(k) retirement plan was endorsed as a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001), and with this plan, staff or employees can decide or choose whether to contribute a post-tax elective deferrals or a pre-tax elective deferrals in or under the 401(k) plan. So this Roth 401(k) plan is more or less a type of retirement plan wherein you can choose between paying as early as now or deduct it on your salary or wage.

To sum up and compare both retirement plans, the traditional 401(k) is a type of plan wherein employees were about to pay the deduction through their monthly wages, so it would be like letting your employer collect your payment and then put it in a certain account and they can use it or rather invest it in some available types of investments, while for the Roth 401(k) it would be the employee who will directly pay the tax upfront since they don’t want it to be deducted on their monthly salary or they can also do the traditional 401(k). In short, they can either choose to pay upfront or upon salary – they can do it on a pre-tax elective deferral or post-tax elective deferrals.

Another important thing that you have to remember on paying for a retirement savings plan is that if you are an employee with an age below 50 then the amount that you are about to pay or should be paying is $15,000, that’s per year but if you are a person who is at the age of 50 and above, then the amount that you were about to pay is $20,000, this is also per year. So that’s like an additional of $20,000 for above 50 year old people.

Many employers offer their employees a 401K plan when they are hired. Often it is not something you think about, but it can be the difference between a comfortable retirement and one that is strife with financial worry.

Benefits of a 401K Plan

Having a 401K plan is like getting money for free from an employer. It also lowers the income you are taxed on when April 15th rolls around. You are able to save money without worrying about making weekly deposits or taking a large chunk of your money and investing in an IRA account. It gives you the freedom that comes from knowing that once you are ready to retire, you will have a nice nest egg upon which to sit.

The 401K Difference

In many instances you can determine how much you deposit into your account each time you receive your paycheck. Some employers limit the amount but the limits of your employer may not equal the limits of the IRS so it is in your best interest to try and direct as much money into your 401K per year as possible.

The money deposited into a 401K is from your gross salary and not the net amount you receive in a typical paycheck. You don’t even see this money so it doesn’t hurt you financially to have it deposited each pay period and even better, you don’t get the chance to spend it.

Some lucky employees have an employer that is happy to match some part of the contribution invested in the 401K plan. This is a great incentive to participate in the 401K plan and where the free money comes into play.

The money in your 401K is not invested and handled by the employer; instead it is handled by a third party. They administer and invest the money and you have a hand in deciding where you want your money to go. You will often receive a list of investment opportunities that also list the risk factors involved so that you may choose the one that feels right to you.

Don’t Count on Social Security

In the past, those that worked for a living could look forward to a nice check from their social security deposits made throughout the years they were employed. This can’t be counted on these days and the working class has to look out for their own best interests when it is time to retire. If you are presented with a 401K plan or a self directed 401k at your job, take your employer up on their offer. If you work for yourself so that you have peace of mind that you will have the necessary funds in hand so that you may live out your retirement in comfort.

For future years, the limit will be indexed for inflation, increasing in increments of $500. In eligible plans, employees can elect to have their contribution allocated as either a pre-tax contribution or as an after tax Roth 401(k) contribution, or a combination of the two. The total of all 401(k) contributions must not exceed the maximum contribution amount.

If the employee contributes more than the maximum pre-tax limit to 401(k) accounts in a given year, the excess must be withdrawn by April 15th of the following year. This violation most commonly occurs when a person switches employers mid-year and the latest employer does not know to enforce the contribution limits on behalf of their employee. If this violation is noticed too late, the employee may have to pay taxes and penalties on the excess. The excess contribution, as well as the earnings on the excess, is considered “non-qualified” and cannot remain in a qualified retirement plan such as a 401(k).

Plans set up under section 401(k) can also have employer contributions that (when added to the employee contributions) cannot exceed other regulatory limits. The total amount that can be contributed between employee and employer contributions is the section 415 limit, which is the lesser of 100% of the employees compensation or $49,000 for 2010 and 2011. Employer matching contributions can be made on behalf of designated Roth contributions, but the employer match must be made on a pre-tax basis.

Update: If you’re still confused, read the comments for further clarification.
Update 2: Updated the limits for 2011.

The short answer to the question is, no. By law, you can not withdraw 401k contributions, that is, pre-tax salary deferrals, before severance, plan termination, turning 59 1/2, death, disability or hardship (and you can’t roll over hardship withdrawals).

The long answer is, yes, under certain circumstances, you can.

The standard exceptions do apply, for example, if you are 60 years of age or older, and still working, most qualified plans allow “age 59 1/2 rollovers”. If a particular plan does not, they most likely allow rollovers at age 65. The exceptions can add to the confusion and there is such a thing as the “in-service withdrawal”.

To me, the most interesting exception being the fact that the law only applies to your pre-tax salary deferrals. You CAN rollover (or otherwise withdraw) employer contributions, or employee (after-tax or rollover) contributions. And you can do so without any required taxes or penalties.

This can be a big deal. I know someone who’s matching contributions from his company were paid in company preferred stock and it ended up comprising a whopping 75% of his total plan holdings. He was not allowed, then, to diversify any matching funds elsewhere within the plan.

Being able to rollover the employer contributions was a great opportunity for him diversify his porfolio, get back to a better asset allocation, and contribute to more cost effective funds. But, it was not without penalty. The penalty (defined specifically by his company’s plan) was that he could not contribute to his plan for 12 months beginning from the day the withdrawal took place.

Some employer retirement plans have provisions for you to do a 401k rollover on some of the assets while you are still employed by the employer, but you’ll need to check with your employer to see if they allow it, and what penalties may be associated with it. Most 401k prospectuses and companies in general don’t make this common knowledge to employees.