401(k) Plan

What Is a 401(k) Plan?


If you have a Roth 401(k) option, your contributions are made with after-tax dollars, and are tax-free when distributed from the plan. Earnings are also tax-free if your distribution is qualified. Generally, a distribution is qualified if you are 59½ or older (or disabled) and you satisfy a five-year holding rule.


If you elect to participate in a 401(k) plan, you can allocate a percentage of your salary to your plan every paycheck. The maximum annual contribution is $19,000 in 2019. If you will be 50 or older before the end of the tax year, you can contribute an additional $6,000. Contribution limits are indexed annually for inflation. The funds in your pre-tax account will accumulate tax deferred until withdrawn, when they are taxed as ordinary income (except for any after-tax contributions you've made).

Employer contributions are often subject to vesting requirements. Employers can determine their own vesting schedules, making employees partially vested over time and fully vested after a specific number of years. When an employee is fully vested and separates from service, he or she is entitled to all the contributions made by the employer.

In plans that offer loans, you may also be allowed to borrow money from your account (up to 50% of the vested account value or $50,000, whichever is less) with a five-year repayment period (or even longer for certain home loans). Of course, if you leave your job, the loan may have to be repaid immediately.









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