A 401(k) is a retirement plan offered by your employer that gives you the option to contribute a percentage of your salary on a tax-deferred basis. Depending on your target retirement date and financial needs, you can choose the type of investment funds within the plan that makes the most fiscal sense—from conservative to aggressive. You can also choose how much of your paycheck to invest and how frequently you wish to contribute throughout the year. Your investments may grow over time and when you turn 59½, you may be able to withdraw these funds without penalty. -John Hancock
In most cases, when you accept a job offer, your employer will give you a bunch of paperwork to fill out. This ranges from health care plans, terms of employment, and a 401k plan of their choosing (occasionally allowing options to the employee). But sometimes participation of these plans have stipulations:
But please note: you can not be turned down for a plan just because you are old.
Information gathered from the IRS
A traditional 401(k) plan offers the maximum flexibility of the three types of plans. Employers can choose to make contributions on behalf of all participants, match employees’ deferrals, or do both. These contributions can be subject to a vesting schedule (which provides that an employee’s right to employer contributions becomes nonforfeitable only after a period of time). In addition, a traditional 401(k) allows participants to make pre-tax contributions through payroll deductions. Annual testing ensures that benefits for rank-and-file employees are proportional to benefits for owners/managers.
A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, must provide for employer contributions that are fully vested when made. However, the safe harbor 401(k) is not subject to many of the complex tax rules that are associated with a traditional 401(k) plan, including annual nondiscrimination testing.
An automatic enrollment 401(k) plan allows an employer to automatically deduct a fixed percentage or amount from an employee’s wages and contribute that amount to the retirement plan unless the employee has affirmatively chosen to contribute nothing or a different amount -IRS
What happens to your 401(k) or 403(b) depends on how much money you have in your account when you and your employer part ways. It’s important to note that the balance thresholds that apply are for what’s called your vested balance. This is a combination of your own contributions (which are always vested) and contributions your employer made that cannot be taken back when you leave.
Need a refresher on vesting? This is a process in which employer contributions to an account gradually become yours. This usually plays out over the years and is used by some companies to retain employees. For example, your employer might use a vesting formula that says you get ownership of 20% of its contributions to your 401(k) each year up until you own everything outright after 5 years. If you left after 3 years, you’d only be able to take 60% of your employer’s contributions with you. The other 40% would stay in your employer’s plan. Regardless of when you leave, you’ll be able to take 100% of your own contributions with you. -Fidelity
The IRS rule of 55 recognizes you might leave or lose your job before you reach age 59½. If that happens, you might need to begin taking distributions from your 401(k). Unfortunately, there's usually a 10% penalty—on top of the taxes you owe—when you withdraw money early.
This is where the rule of 55 comes in. If you turn 55 (or older) during the calendar year you lose or leave your job, you can begin taking distributions from your 401(k) without paying the early withdrawal penalty. However, you must still pay taxes on your withdrawals. -Charles Shwab
Information from Farm Bureau Financial Services, US News, Investopedia, and John Hancock
Contributions to a traditional individual retirement account (IRA), Roth IRA, 401(k), and other retirement savings plans are limited by law so that highly paid employees don’t benefit more than the average worker from the tax advantages that they provide. Contribution limits vary by the type of plan, the age of the plan participant, and, in some instances, how much the person earns.
Information from Investopedia
