The 401k rollover rules, distribution rules, deductions and 401k contribution limits seem so complicated and yet they were all created by the government to be relatively simple to follow.
But they are not simple, they are complicated so we will break down each rule for you. If you know the rules and how they apply to you, then you should have an easier time managing your 401k account towards growth.
Help Your 401k Account Grow|Know The 401k Rules
Tip #1 – 401k Contribution Limits:
- The fastest way to build up your 401k account value is to always max-out the 401k contribution limit every year.
- 401k limits are generally adjusted on an annual basis for cost-of-living increases.
- For 2010 and 2011, the 401k contribution limit is $16,500 with a catch-up contribution of $5,500.
Note: The 401k contribution limit amounts are just for your personal 401k contributions; those limit amounts do not include any matching contributions made by your employer.
Tip #2 – Investing Your 401k Plan Deductions:
- One key to building a successful 401k account is diversification. When you make your 401k deductions, spread the deduction into a few different investment choices.
- Check with your employer but most 401k investment choices include:
- Cash or money market, mutual funds or direct investing into individual stocks.
Most 401k plans have a wide variety of investment options for you to choose from, every plan is designed differently. The best diversification strategy is to have some money in cash, some in stocks and some in bonds.
Tip #3 – Take Advantage Of Employer Options:
As an added value service to plan participants, many employers are starting to include within the 401k program a personal financial adviser to help participants manage their own accounts. These advisers can help you personalize your account. The adviser can help you understand the investment options and how they best fit within your personal retirement goals, risk tolerance levels and overall financial direction.
If you have a financial adviser, work closely with them to maximize your opportunities to grow the value of your 401k account. It is best to check with your 401k plan administrator about the specific details of your 401k plan; you may be surprised on how accommodating your 401k plan is towards helping you build a strong retirement account.
Tip #4 – 401k Plan Distributions:
401k distribution rules do give you a few different options, let’s review these options:
- You can choose to NOT make a 401k distribution, but rather leave your 401k account balance in your employer’s plan. Some employers will allow you to keep your 401k account in place during your retirement. Check with your employer and your tax accountant on using this option.
- You can make your 401k distribution into your new employer’s 401k plan; but then it would be called a 401k rollover vs a 401k distribution. Make certain that if you make a 401k rollover you follow the proper 401k rollover rules, otherwise you could pay taxes. The 401k rollover rules state that to avoid paying taxes, you personally cannot touch the money. This is accomplished by having the money transferred from one employer to the next without you taking possession of it. This is a sticky rule so be careful otherwise it could get expensive. Again, check with your tax accountant.
- You can take an early distribution without putting the money into another qualified retirement plan (like an IRA or 401k). An early distribution is a distribution made when you are under the age of 59 1/2. If you take a distribution before 59 1/2, you will be subject to taxes plus a 10% early distribution penalty. Avoid an early distribution, it’s too expensive.
Rules, rules, rules. They say rules are meant to be broken, but in the case of 401k rules, that old adage is bad advice. It’s really best to follow all of the 401k rollover rules, 401k distribution rules and 401k contribution rules, otherwise if you break those rules, it could become costly for you.