401k rules

There are several federal laws and regulations designed to help investor’s get the most from their 401k plan. Many of these rules fall under the Employee Retirement

Income Security Act of 1974 (ERISA).

ERISA legislation

Under ERISA, employers who choose to offer 401k retirement savings plans or other defined contribution plans must inform employees of their eligibility. For many companies this comes after 3 months of employment.

401k oversight required

The employer must also define any expenses related to the account and rules such as how often the investment choices can be changed. This could range from daily to one time per quarter. ERISA rules further dictate that employees must get periodic updates on the investment results of their 401k account. They are then able to make changes at pre-disclosed frequencies.

401k plans through payroll deduction

As long as an investor is employed for a long enough period of time, they can begin contributing to the 401k plan through regular, pre-tax withdrawals from their salary.

The amount withdrawn is designated as a percentage of their salary, whenever that is paid out. For example, if a salaried employee wishes to contribute 3 percent of their income to their 401k account and earns a gross income of $30,000 per year, then $900 pre-tax dollars will go into their account by the end of the year. If they are paid weekly, that means approximately $17.30 will be taken from their paycheck for the account, then the remaining salary is taxed.

Few 401k eligibility rules

Age is not a factor in determining if an employee can invest in a 401k retirement plan. Any adult who is over 18 and employed by a company offering such a plan can invest. In fact, as with all retirement savings plans, the earlier one starts saving the more they will have by retirement age.

401k plans have early withdrawal penalties

Company sponsored 401k plans, like other retirement savings plans are designed to make it more advantageous to leave funds in the account until retirement age than to make withdrawals for other purposes. The same 10 percent penalty associated with early, unqualified withdrawals from an IRA apply to the 401k account. It is therefore, important for investors to carefully plan how much they can afford to save so they will not come to depend on those savings before age 59 ½.

401k plans make it easy to save for retirement

A good idea for many investors in a 401k plan is to increase the percentage contributed to the account as salary increases occur. If the employee receives a 5 percent performance or cost of living raise, then perhaps 1 or 2 percent could added to their current 401k contributions. If increases are made at the time of the pay raise then the employee will still be getting more in their take home pay while setting aside more for the future. Since the percentage allocated toward the 401k is before taxes, it will still feel like a significant pay raise.