401(k) rollover
When individuals stop working for the business sponsoring the 401(k), they typically have four options regarding their 401(k) savings. They can choose to leave their savings in that 401(k), roll over (move) their money to another 401(k), roll over their money to an IRA, or take a cash distribution of their savings. If an individual dissolves their 401(k) and takes the cash, it’s counted as income that year and taxed because the contributions were not taxed when deposited into the 401(k). You will be taxed for the contribution and all the interest earned unless your 401(k) was set up as a Roth, or after-tax plan. Many individuals choose to roll their 401(k) money directly into an IRA or into a 401(k) offered by their new employer. Expert advice: Look at the investment choices available to you and the fees associated with the plan or IRA before making any moves.
401(k) withdrawal
In saving for retirement, tax laws are designed to discourage savers from taking money out of a 401(k) before they retire. Money can only be taken out of a 401(k) after certain events occur such as leaving employment, disability, and retirement. Many 401(k) plans allow individuals to take a withdrawal before retirement if they are experiencing a financial hardship. Distributions took before an individual reaches retirement age may be subject to early distribution taxes as well as income taxes.
Required minimum distributions
If someone reaches age 73 and still has money in their 401(k), they must begin taking a minimum payment each year until the account is depleted. Some 401(k) plans provide exceptions for older workers who are still employed. When the 401(k) participant dies, the person(s) they named as beneficiary generally must continue taking payments out of the 401(k).
Employer 401(k) contributions
Many employers make additional contributions to their employees’ 401(k) plan accounts to help their employees reach their retirement planning goals faster, while also taking advantage of additional tax benefits for their business. The most common employer contribution is a match on a portion of the dollars an employee puts into the plan – for example, an employer may choose to contribute $1 for each dollar the employee contributes, up to the first 3% of the employees’ pre-tax pay. Employers, including self-employed individuals, also sometimes make discretionary profit-sharing contributions to their employees.
Maximum 401(k) contributions
For 2023, you can save up to $22,500 of your pay in a 401(k) ($30,000 if you’re age 50 or older). In addition, the business may make matching or profit-sharing contributions. Employee contributions, combined with any employer contributions, cannot be greater than the employee’s income for the year, up to a maximum of $66,000 for 2023.
Limits for high-earning individuals
Tax laws require 401(k) plans to pass nondiscrimination tests each year to make certain the 401(k) is not primarily benefiting high-earning individuals within the company. The IRS wants to ensure that plans that are being established within an organization are fair and balanced, hence the name, nondiscrimination testing. If lower-paid individuals are not making significant contributions, high-earners and business owners may not be able to maximize their contributions.
