Because the 401(k) is such a sweet tax shelter, there are all sorts of regulations controlling how money goes in and comes out.
Knowing as much as you can about the plan you are in — or the plan of a company you may be considering — is crucial.
Here's a roundup of the rules:
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Eligibility. Although companies can require you to wait for up to one year to join, most don't.
Employee contributions. In 2015, most employees can contribute up to $18,000 to their 401(k) plan, 403(b) plan, federal Thrift Savings Plan or most 457 plans. Some highly compensated workers who earn $120,000 or more may not be able to contribute the full amount if not enough lower-paid employees participate in the retirement plan. And there's a catch-up provision in case you're nearing retirement and haven't accumulated a large enough nest egg. Those 50 and older can shovel in an extra $6,000. Even highly compensated employees whose contributions are restricted can make catch-up contributions if their plan allows it.
Matching contributions. These are made at the discretion of the company. Total employee and employer contributions are limited to the lesser of 100% of salary or $53,000 in 2015, plus catch-up contributions for workers 50 and older. A typical employer match is 50 cents or $1 for every $1 the employee contributes, up to the first 6% of pay.
There is no rule of thumb for when the match is applied. It may be every pay period, every quarter or even on the last day of the year. Knowing when your company makes its matching contributions could be a factor if you are thinking about switching jobs. You don't want to leave just before the match is made.
Vesting. Your own contributions are immediately "vested," meaning they are yours to keep if you leave the company. Company contributions can vest immediately or over a period as long as six years.
Loans. Allowed by most plans (see Borrowing From a 401(k) Can Lead to Trouble).
Early withdrawal. No withdrawals (except hardship withdrawals) are allowed before age 59½ while you are employed. If you leave the company before age 55, withdrawals are taxed and generally hit with a 10% penalty, unless they're rolled over into an IRA or another employer's 401(k).
Hardship withdrawal. A plan may allow early withdrawal of your contributions if you face financial hardship and can show you have no other source for cash. Such withdrawals are taxed and penalized if you're under 59½.
Cashing out. Upon leaving the company, you can transfer your balance tax-free to an IRA. Distributions not rolled over are taxed as ordinary income, in your top tax bracket (except to the extent you made after-tax contributions). Employers now are required to roll over 401(k) balances between $1,000 and $5,000 into an IRA for you. Accounts with less than $1,000 will be automatically cashed out — and fall subject to taxes and penalties. Departing employees with accounts worth more than $5,000 will have the option of leaving their money in their former employer's 401(k) plan.
Company stock. Special rules may make it beneficial to withdraw company stock rather than rolling it into an IRA. The stock is taxed at its value when it went into the plan; appreciation — both inside the plan and after withdrawal — will be taxed as capital gains when you sell the stock.
Mandatory withdrawals. You must begin to draw down your 401(k) by April 1 of the year after you turn 70½ or when you retire, whichever is later.
Locked out of a new employer's plan? Do a little payroll deducting on your own, saving the money in a taxable account until the doors of the 401(k) open. Then double up your contributions for a while, using the money you set aside to make up for the shortfall in your paycheck.
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