Those 401K Laws Every Investor Must Know

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401K Laws

401k laws401k laws were established to protect you as an investor.

The laws spell  out the rules and regulations that must be followed on 401k investments, 401k contribution limits and 401k withdraw rules.

It’s because of 401k laws that you can feel confident when investing in a 401k.

The 401k laws help to make the 401k rules the same for all investors.   There is no favoritism when it comes to 401k investing; and that’s a positive thing.

401k laws set up the guidelines that 401k plans must follow.   The guidelines  spell out what employers as plan sponsors must do and what employees who are participants can or cannot do.

The laws are intended to make 401k’s safe since the majority of Americans will be heavily relying on 401k’s for their retirement.

The 401k Laws You Need To Know:

401k Investments.

  • 401k plans are highly regulated by the IRS and the Department of Labor.
  • IRS regulations allow 401k plans to only offer certain types of investments.
  • 401k plans can offer stock investments, mutual funds, bonds, money market accounts or a cash equivalent.
  • The IRS feels confident that those standard investment choices will have moderate but not drastic swings; therefore are relatively safe for investors who are investing in 401k plans.
  • Since 401k plans are so highly regulated they do not offer anything outside those standard investment vehicles.
  • It is your employers responsiblity to offer investment choices that are save, diverse and that cover all asset classes.

401k Contribution Limits.

  • IRS regulations set the 401k contribution limits.
  • The IRS limits may increase these limits every year to adjust for inflation.
  • For 2010, the maximum 401k contribution limit is $16,500.
  • There is also a catch-up contribution limit of $5,500 if your over age 50.
  • The government established the catch-up contribution to give   individuals an opportunity to save extra money on a tax-deferred basis as they get closer to retirement.

401k Withdrawals.

  • 401k withdrawals made before age 59 ½ are considered early withdrawals.
  • Early withdrawals will be taxed.
  • If you are under age 59 1/2  you will also incur a 10% withdrawal penalty.

401k Loans.

  • 401k plans are not required by law to offer loan capabilities.
  • You can borrow up to 50% of your vested account balance.
  • 401k loans must be repaid within 5 years.
  • 401k loans are not subject to taxes, unless you default on the loan.
  • If you do not repay the loan, the IRS considers it an early 401k withdrawal.
  • Early 401k withdrawals are taxed and subject to the 10% withdrawal penalty.
  • A 401k loan cannot be rolled over to an IRA.

401k Hardship Withdrawals.

  • Hardship withdrawals are subject to taxes.
  • If you are under the age of 59 1/2 you are also subject to the 10% withdrawal penalty.
  • You do not have to repay a 401k hardship withdrawal.
  • You must qualify for a 401k hardship withdrawal.
  • To qualify the IRS stipulates that you must need the funds from for the following reasons:
  • Purchase of a primary residence.
  • To pay for the cost of higher education.
  • Medical expenses that are not reimbursed to you.
  • To prevent eviction from your home.

Like any other law, 401k laws are not flexible.  You may not like all of these  laws  set up by the IRS and Department of Labor, but you as a participant in a 401k plan must follow them.   Your employer must follow them, your tax accountant must follow them and your financial advisor must follow them….again, there is no favoritism when it comes to 401k plans.

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