401 (K) Retirement Plan Regulations and Rules

There are 401(k) regulations that are common to all plans.

There are 401(k) regulations that are common to all plans. Your employer can require you to wait up to one year before allowing you to enroll in the plan. The money in the plan compounds tax deferred, and for that privilege, you normally don't have access to the money until you reach age 59 1/2. Pulling it out before age 59 1/2 could trigger a 10 percent penalty that is imposed by the IRS. The rules require that mandatory distributions must begin at age 70 1/2 and are taxed as income.

Some plans let you borrow from your account. You are permitted to borrow up to one half of the amount in your account with a limit of $50,000, and the loan must be repaid within five years. One of the pitfalls of borrowing from your 401(k) plan is that, if you lose your job, the loan amount could be due an payable within 60 days or less. So think before borrowing.

Upon leaving your job, you do have access to the money in your 401(k). You can do a direct transfer to a rollover IRA, a direct transfer to your new employer's plan if it allows transfers, or if there is more than $5,000 in your account, your employer has to allow you to leave the money there. The transfers should all be made between the plan trustees, and you should not take possession of the money.

Your last option when you leave a job is to take the money and run. This is not a good idea, though; if you do, your employer is required to withhold 20 percent for taxes. If you are in the 28 percent tax bracket and live in a state where you will owe state income taxes, your tax liability could be close to 35 percent, and then there is that 10 percent penalty that just won't go away. So you could lose almost half of your money to taxes and penalties. It's better to keep those dollars working for you in a retirement plan.