A 401(k) plan is a special type of tax-qualified deferred compensation plan, which gets its name from the section of the US Internal Revenue Code. Under a 401(k) plan, an employee can elect to have the employer contribute a portion of his or her pre-tax wages to the plan. These deferred wages are not subject to income tax withholding at the time of deferral, though they are included as wages subject to social security, Medicare, and federal unemployment taxes. Taxes will be due upon redemption, in most cases.

There are limits to the amount that an employee may elect to defer to a 401(k) plan. The tax law limits the maximum contributions that can be taken out of your salary. If desired, you may contribute less. You may be able to put in additional catch-up contributions, if you are age 50 or older.

Check with your plan administrator or Summary Plan Description for details specific to your plan.

Employees usually can select from a number of different investment options in the 401(k) plan. The money grows tax-deferred, meaning people don't have to pay tax on it until they take distributions from their plan (usually after they reach retirement age of 59 & 1/2; if employees elect to take money before age 59 & 1/2;, they may be subject to an additionally 10% tax penalty).

Distributions from a 401(k) plan may qualify for lump-sum distribution or rollover treatment, as long as they meet the respective requirements. According to IRS regulations, you are required to begin receiving distributions no later than April 1st following the year you reach age 70 & 1/2; (unless you are still working for the company or are a 5% owner).

Once you begin receiving required distributions, you must continue to receive them until your account value is depleted or until your death.

Many 401(k) plans also allow employees to make withdrawals due to "financial hardship," or immediate financial needs.

Check with your plan administrator or Summary Plan Description to see if loans are also available for your plan.


Source: IRS consumer website www.irs.gov/taxtopics/tc424.html