The 401(k) plan has become the most popular type of employer-sponsored retirement plan in America since its inception in 1978. Few other plans can match the relative flexibility of the 401(k). There are rules to follow, however, because you're getting tax breaks from the fe♛deral government in return for investing for retirement.

Millions of workers depend on the money they invest in these plans to provide for them in their retirement years and, for many, it's a key benefit of the job.

What Is a 401(k) Plan?

A 澳洲幸运5官方开奖结果体彩ജ网:401(k) plan is a retirement savings account that allows an employee to divert a portion of each paycheck salary into long-term investments. The employer may match part of the employee's contribution as a job benefit.

A 401(k) is technically a qualified retirement plan, meaning it is eligible for special tax treatment under Internal Revenue Serviౠce (IRS) guidelines.

Defined Contribution Vs. Defined Benefit

Qualified retirement plans come in two versions. They may be either 澳洲幸运5官方开奖结果体彩网:defined contribution plans or 澳洲幸运5官方开奖结果体彩网:defined benefit plans, such as a pension.

The 401(k) plan is a defined contribution plan. That means the employee manages the fund and chooses the investments. When the employee retires, the accou🐠nt balance is theirs to use as they see fit.

(A defined benefit plan, such as a pension, is managed by the employer and guarantees a lifetime payment based on the person's salary history.)

In a traditional 401(k) plan, the money that the employee pays into the 401(k) is tax-deferred. No income taxes will be due until the money is withdrawn. The earnings are not taxed until they're used either.

The Roth 401(k) Variation

Not all employers offer it, but the 澳洲幸运5官方开奖结果体彩网:Roth 401(k) is an increasingly popular variation of the t♛raditional 401(k) plan.

If you have a Roth plan, you'll pay income taxes on the money you pay into your fund. When you withdraw it after you retire, no further taxes will be due on the principal or the earnings.

401(k) Contribution Limits

The maximum amount of salary that an employee can defer to a 401(k) plan, whether traditional or Roth, is $23,500 in 2025, up from $23,000 in 2024. Employees aged 50 and older can make additional catch-up contributions of up to $7,500.

The IRS also limits the maximum joint contribution by both employer and employee. The maximum joint contribution by both parties is $70,000 in 2025 or $77,500 for those over 50.

Contributions to a traditional 401(k) are made with pre-tax dollars and reduce the employee's taxable income as well as 澳洲幸运5官方开奖结果体彩网:adjusted gross income (AGI). Taxes are deferred until 🌌the funds are withdrawn.

Limits for High Earners

For most people, the contribution limitsꩲ on 401(k)s are high enough to allow for adequate levels of income deferral. ♚But there is a cap.

Highly paid employees can only use the first $350,000 of income when computing their maximum potential contributions in 2025.

401(k) Investment Options

A company that offers a 401(k) plan typically offers employees a choice of 澳洲幸运5官方开奖结果体彩网:several investment options. The options are usually managed by a financial services ad༒visory group such as The Vanguard Group or Fidelity Investments.

The employee can choose one or several funds to invest in. Most of the options are 澳洲幸运5官方开奖结果体彩网:mutual funds, and they may include 澳洲幸运5官方开奖结果体彩网:index funds, large-cap and small-cap funds, 澳洲幸运5官方开奖结果体彩网:foreign funds, real estate funds, and bond funds.

They usually range from aggressive growth funds to conservative income funds. You can adjust your investing strategy from time to time, moving your money to more aggressive or mor𒆙e conservative choices.

Rules for Withdrawing Money

The distribution rules for 401(k) plans differ from those that apply to 澳洲幸运5官方开奖结果体彩网:individual retirement accounts(IRAs), which are not company-sponsored but are available from banks and investment companies.

In either case, an early withdrawal of assets will mean income taxes are due. With few exceptions, a 10% additional tax penalty will be levied on those younger than 59½.

Triggering Events

But while an IRA withdrawal doesn't require a rationale, a 澳洲幸运5官方开奖结果体彩网:triggering event must be satisfied to receive a payout from a 401(k) plan. The following are the usual triggering events:

• The employee retires or leaves the job.
• The employee dies or is disabled.
• The employee reaches age 59½.
• The employee experiences a specific hardship as defined under the plan.
• The plan is terminated.

Money withdrawn from a 401(k) is usually taxed as 澳洲幸运5官方开奖结果体彩网:ordinary income.

Depending on your company's rules, you may also be able to take a loan from your 401(k), paying yourself back over time.

Post-Retirement Rules

Account owners who turned 73 on or after Jan. 1, 2023, must begin taking 澳洲幸运5官方开奖结果体彩网:required minimum distributions (RMDs) at age 73 unless they🐎 still work for the ♚sponsoring employer and have a plan that allows them to defer RMDs.

The age for R♔MDs has been raised a ꦫcouple of times in the past and may well be raised again.

The Rollover Option

Retirees may choose to transfer the balance of their 401(k) plans to a traditional IRA or a Roth IRA. This rollover gets them access to a broader array of investment choices than employers usually offer for 401(k) accounts.

If you decide 澳洲幸运5官方开奖结果体彩网:to do a rollover, make sure you do it right. In a direct rollover, the money goes straight from the 澳洲幸运5官方开奖结果体彩网:old account to the new account and there are no tax implications. In an indirect rollover, the money is sent to you first, and you will owe the full income taxes on the balance in that tax year.

If your 401(k) plan has employer stock in it, you are eligible to take advantage of the 澳洲幸运5官方开奖结果体彩网:net unrealized appreciation (NUA) rule and receive capital gains treatment on the earnings. That will lower your tax bill significantly.

401(k) Plan Loans

If your employer permits it, you may be able to take a loan from your 401(k) plan. If this option is allowed, up to 50% of the vested balance can be borrowed up to a limit of $50,000. The borrower must repay the loan within five years. A longer repayment period is allowed for a primary home purchase.

In most cases, the interest paid will be less than the interest on a bank or consumer loan and you'll be paying it to yourself. But be aware that any unpaid balance will be considered a 澳洲幸运5官方开奖结果体彩网:distribution and taxed and penalized accordingly.

In addition, should you leave your employer, you will be required to pay any pending 401(k) loan balance in full or face IRS tax or penalties.

Hardship Distributions

Emergencies happen. And you may find that the only place you can turn to meet your immediate financial needs is your retirement plan. While it may not necessarily be the best route, you have the option to take a 澳洲幸运5官方ꦅ开奖结果体彩网:hardship distribution or withdrawal.

Several considerations c𒅌ome into play with this kind of withdrawal:

• There must be a clear and present 澳洲幸运5官方开奖结果体彩网:need 🧔to take a hardship distribution. It can also be a voluntary or foreseeable need as long as it is reasonable.
• The amount of the withdrawal must not exceed the need.
• You can't take any elective distributions for six months after the hardship withdrawal.

This type of withdrawal is taxable. Full details on hardship distributions are available through the .

401(k) Strategies

澳洲幸运5官方开奖结果体彩网:No single retirement strategy is best for everyone but some tips benefit most investors, especially those looking to 澳洲幸运5官方开奖结果体彩网:make the most of their retirement sa✤vinℱgs.

Maximize Employer Match

One of the golden rules of retirement savings is to contribute at least enough mo♊ney to take full advantage of your employer match.

For example, if your employer matches dollar for dollar your first 4% of 401(k) contributions, you should strive to put at least 4% into your 🧸401(k).

This strategy maximi🤪zes the free money you receive from yo🌠ur employer.

Be Mindful of Contribution Limits

The IRS does not permit contributions that exceed its annual 401🌞(k) limits. Should you overcontribute, you are required to then withdraw those excess contributions, triggering taxes and penalties.

The 401(k) contribution limit for both traditional and Roth 401(k)s is $23,500 in 2025, up from $23,000 in 2024. There's an additional catch-up contribution of $7,500 for individuals 50 years or older.

Compare Roth and Traditional 401(k) Benefits

In general, it is better to contribute to a Roth account if your 澳洲幸运5官方开奖结果体彩网:tax bracket is currently low and you expect to be higher in the future. It is usually better to contribute to a traditio𝄹🏅nal account when your tax bracket is currently high.

This is a personal financial decision. A Roth account is a little more painful upfront in exchange for a lot of gain down the road. That is, you get no immediate tax break and no reduction in your annual taxable income. But when you withdraw the money after retiring, you'll owe no taxes on that income.

Avoid Early Withdrawals

Should you withdraw retirement plan funds early, in most cases, you will be subject to federal income tax on the withdrawal plus pay a 10% penalty.

The withdrawal also will damage the compounding eff♏ect your investments experience over time. Leaving your 401(k) plan as-is for longer maximizes your potential for long-term portfolio growth.

The Bottom Line

澳洲幸运5官方开奖结果体彩网:Saving for retirement should be on your radar if you hope to maintain the same ❀lifestyle you currently have. But with so many options, where do you start? The best place is the 401(k) plan, which is offered by employers.

If your company has this plan, take advantage of it. This is even more important if your employer matches contributi💞ons.

But it isn't just about saving money. Knowing the ins and outs and the rules associated with the plan can make you a better investor.