How much you can contribute
Workers can contribute up to $17,500 to a 401k in 2014, an amount that is adjusted annually for inflation. Employees age 50 and older can deposit an additional $5,500.
When to contribute
Some 401k plans allow you to sign up as soon as you start a new job, while others impose a waiting period of a few months or even a year before you can begin to contribute. Deposits to the account are typically made with money withheld from your paycheck.
How much you save in taxes
Traditional 401k accounts allow you to defer paying income tax on the funds you contribute until you withdraw the money. To find out how much you will save, multiply your contribution amount by your tax rate. You may also get a tax break at the state level. Low-income savers may additionally qualify for the saver’s tax credit
How to get a 401k match
Many employers will match part or the entire amount you contribute to a 401k. Match formulas vary considerably by employer, but the most common 401k match is 50 cents for each dollar saved up to 6 percent of pay. Getting a 401k match is the quickest way to build up a large 401k balance.
When you become vested in the plan
While you always get to keep your contributions to the 401k, you don’t get to keep your 401k match or other employer contributions until you are vested in the plan. While some employers offer immediate vesting of employer contributions, other companies don’t let you keep the entire 401k match until you have been with the company for as long as five or six years.
How to avoid the early withdrawal penalty
If you leave your job at age 55 or later, you can take 401k withdrawals from your most recent 401k without incurring the 10 percent early withdrawal penalty. However, if you leave a job with a 401k before age 55 or roll the money over to an individual retirement account, you’ll have to wait until age 59½ to avoid the penalty
How to add tax diversification with a Roth 401k
Roth 401k’s allow you to prepay the income tax on your retirement savings, and then withdrawals in retirement will be tax-free. Roth accounts are a particularly good deal for young and low-income workers who expect to be in a higher tax bracket in retirement than they are in now.
What your 401k is costing you
Of course, 401k accounts aren’t free. The Labor Department requires that data about the cost of each investment option be provided to individual 401k participants. Use this fee information to select the lowest-cost funds that meet your investment needs.
What to do when you change jobs
When you switch jobs, you have three options that will allow you to avoid paying income tax and the early withdrawal penalty: Leave the money in your old 401k plan, roll it over to an IRA or shift the balance to your new employer’s 401k plan. Take a look at each option to see which has the best fund choices and lowest investment costs.
When to begin required minimum distributions
Typically, 401k withdrawals become required after age 70½. However, investors who continue to work after age 70½ (and don’t own 5 percent or more of the company sponsoring the 401k plan) can defer distributions from their current 401k until April 1 of the year after they retire. The penalty for missing a required distribution is 50 percent of the amount that should have been withdrawn.
