New 2011 IRS Rules
Both 401k contribution limits and withdrawal rules change this year. While the financial sector still defines and administers the retirement plans, it is IRS (Internal Revenue Service) that regulates them. The 401k plan becomes the most popular one for saving for retirement, which works as following: employees decide about the percentage of their salary they want to place to their account, after which that amount is deposited into their personal 401k accounts within the payroll cycle each pay period. Besides, the employees also decide about the investment choices within the plan themselves as well.
There are some rules that apply to all retirement plans – for example, withdrawal rules, eligibility of participant, and contribution limits. Meanwhile, as opposed to IRA, the 401k plan is considered as most valuable and flexible retirement plan. Those employers who want to offer their employees the option of taking part in a 401k plan have to comply with the IRS rules. First of all, minimum age of 21 must have been attained, along with 1 full year of service prior to enrollment completed. The employee shouldn’t be eligible for a union retirement, while older ones can’t be exempted from participation. A traditional plan implies that the employer is free to contribute a non-elective percentage, either it be a certain amount or percentage without input. It can also match a portion of their contribution in order to encourage employees to participate.
On the other hand, a safe harbor plan means that the employee’s contributions are required every year. Sometimes the employers opt to an automatic enrollment plan for each employee. Then the annual non-elective or matching contributions are made every year to each account.
As for the contributions to a 401k account, they are made before withholding income tax from the employee’s paycheck. In fact, it is tax deferment on retirement savings that is considered to be a very powerful incentive for employees to participate. Since income tax is withheld at the moment when funds are withdrawn during retirement, the income tax bracket becomes lower. Therefore, in order to prevent tax avoidance schemes, the IRS has established certain limits on the contributions that are made to a 401k accounts.
The combined employee/employer contribution limit was $16,500 for the 2010 tax year both in traditional and safe harbor accounts. However, for this tax year, the limits haven’t been published yet, so we can only note that they’ve held steady for both 2009 and 2010. Meanwhile, employees over 50 were allowed additional catch-up contributions of $5,500 in 2010.
Originally, a 401k account is destined for saving money and investing wisely in order to increase the fund value to make them available for living expenses after working years. The loans are available for limited periods before the age of 59 and half years, while penalties are imposed for both early distributions and withdrawals. If employment changes, the funds under 401k plan can be taken for rollover to a traditional IRA account. Then, after another employer is found, it starts a new 401k plan.
The IRS code considers specific events as hardships and covers them by special rules – for example, educational, funeral and medical expenses, and damage to primary residence. When employment ends or at the age of 70 and half years, the retiree must start drawing funds and paying tax on his withdrawals.
Today lots of people can’t understand how they are able to afford to contribute to a retirement fund if they don’t earn much. However, spending the 1st year before eligibility cutting expenses and putting the first 3% aside in a savings account can prove that it’s possible over the long term. They would see then that matching funds add up rapidly, encouraging further participation.
It is recommended that you contact your financial adviser to assist you in evaluating the participating funds within 401k plan you invest your distribution in. You shouldn’t guess at where to invest your savings in order to optimize your returns, because market’s ups and downs may make you worry more about long-term investments. It’s better to monitor the performance of your 401k account twice a year instead of scrutinizing it each quarter.
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March 25th, 2012 at 5:58 pm
Actually I understand the necessity of new IRS rules – if they don’t set any limitations here, everyone would be able to avoid paying taxes
March 25th, 2012 at 7:51 pm
If your employer gives you a possibility to participate in 401k program you should take your chance, don’t think you can’t afford this – IRS rules will certainly allow you to save more on better terms.
March 25th, 2012 at 8:39 pm
The IRS rules are rather logical, especially because of those for specific events – hardships happen. thanks for that.
March 27th, 2012 at 9:44 pm
I also think new IRS rules are reasonable, but it would be better it were not necessary to contribute every year. All of us may stay without job at any time…so what should we do then?
March 28th, 2012 at 4:35 pm
They always change these rules – i haven’t used to the previous yet and they have alredy changed them again!
March 28th, 2012 at 5:25 pm
I will need this money after retirement , these IRS rules are quite ok to provide me for my old age.
March 28th, 2012 at 5:31 pm
I like this thing about taxes, when contributions are made before withholding income tax from my paycheck. It make 401k a most beneficial one.
March 29th, 2012 at 5:42 pm
сontributions to 401k pension plan will give us an advantage even now because according to these IRS rules we extend this money from the pay-check without paying taxes. so why not?
March 29th, 2012 at 6:03 pm
According to the IRS rules the employee will have to pay taxes after he withdraw money after retirement. Shall I afraid these taxes themselves to become much higher then?
March 29th, 2012 at 6:35 pm
These IRS rules made me think about switching to 401k. hope I won’t regret then.
March 30th, 2012 at 8:18 pm
The IRS rules are the only ones which include hardship events. After I had to use this option I became a great fan of 401k.
March 30th, 2012 at 8:52 pm
I feel like I don’t even have to talk to any financial adviser after reading new IRS rules in your interpretation. Great job, guys!
March 30th, 2012 at 8:55 pm
I really felt like I cannot afford contributing every year…but IRS rules give me a possibility to pay much less taxes from my pay-check. You’ve don great job for me also!
April 1st, 2012 at 7:52 pm
Although IRS rules include some limits, IRS gives a bit more opportunities then IRA.
April 3rd, 2012 at 12:13 am
IRS rules are quite different from IRA rules as I can see. I don’t have 401k account now, but I’ll certainly think it over.
April 3rd, 2012 at 12:21 am
401k rules is more flexible than other plans’ rules. Looks like IRS does good job.
April 3rd, 2012 at 10:11 pm
This irs rules helped me to learn what to do if i want to change my job. Because i’m actually going to do this, but i was worrying a bit.
April 4th, 2012 at 10:39 pm
if you know irs rules you can dispose of your money in a much more advantageous way. Your work here is great!
April 5th, 2012 at 8:55 pm
Proper understanding of 401k contribution limitation and other rules can really make you reach in the future!
April 7th, 2012 at 10:37 pm
I didn’t know IRS regulates 401k, I thought IRA does. The plan itself looks profitable.
April 10th, 2012 at 11:04 pm
irs rules could be a bit milder for people who are saving for retirement years. But on the whole I totally agree with them
April 18th, 2012 at 12:00 pm
If you know irs rules you know your rights. it is a necessary knowledge.