If your employer offers a 401(k) plan or another type of workplace retirement account, it’s important to understand how much you can contribute, if your company will match it, when the funds are vested, and more. Maximizing your odds at a comfortable retirement may start with something as simple as maxing out your 401(k).

Frequently Asked Questions

  • What are 401(k) plans?

    401(k) plans are employer-sponsored retirement plans that some companies offer to employees. They are defined contribution plans that allow you to contribute up to a certain amount of money that is then invested in different funds.

  • How do 401(k) plans work?

    With a 401(k), you select a certain amount of money that is transferred from your paycheck to your 401(k) account. Traditional 401(k)s use pre-tax dollars while Roth 401(k)s use after-tax dollars. The money in a 401(k) plan is invested and there are rules around contributions and withdrawals. Your employer may offer matching contributions and have a vesting schedule.

  • When were 401(k) plans established?

    401(k) plans were established in 1978 via the Revenue Act, which included a provision to the Internal Revenue Code—Section 401(k)—that said employees did not have to pay taxes on deferred compensation. By 1979, many companies started offering employees 401(k) plans, and by 1981, the IRS recognized 401(k) plans as defined contribution plans.

  • How do 401(k) plans benefit employers?

    Employers are rewarded for contributing to 401(k) plans with tax breaks that vary based on the plan type. The most common include being able to deduct the contributions the employer made from its federal income tax return up to a certain limit, and claiming a tax credit of up to $5,000 for up to three years to help offset the costs associated with starting the 401(k) plan.

  • How much can you contribute to your 401(k)?

    You can contribute up to $19,500 per year to your traditional or safe harbor 401(k) plan as of 2021. For SIMPLE 401(k) plans, you can contribute up to $13,500 per year as of 2021. If you’re 50 years or older and your 401(k) plan permits it, you can also make catch-up contributions worth $6,500 to 401(k) plans and $3,000 to SIMPLE 401(k) plans as of 2021.

  • When can you withdraw from your 401(k)?

    You can typically withdraw from your 401(k) at age 59 ½ if you’re no longer working for the employer who sponsors the plan. You can withdraw from your 401(k) without penalty via a loan, hardship withdrawal, or rollover to an IRA (if you leave the company) at any time. If you reach age 55 and also retire that year or later, you can withdraw from your 401(k). Required minimum distributions begin at 72.

  • What happens to your 401(k) when you quit?

    After you quit a job, your 401(k) account will likely stay put where it is. You won’t be able to contribute to it anymore, but the money will still be invested, tax-deferred. If you have less than $5,000 in the plan though, your money may be sent to you or automatically rolled over into an IRA. You can also choose to roll over your 401(k) plan to an IRA or to a new 401(k) plan with a new employer.

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