What Are the 401k Rules?
It can seem so daunting to keep track of your finances. There’s all the jargon and the different sorts of funds. Who has time and energy to understand not only regular investing, but the 401k rules? It’s easy to be intimidated. There are rules for everything. 401k withdrawal rules — when can I start taking money? How much? What are the taxes?
These are good questions and luckily, the answers are a lot more simple than you’d expect. The most important one: how much can you contribute? Well, each year the cap increases, but last year it was set at $16,000 for an individual. Over age 50, you can add an extra $5,000 as part of the “catch up” provision.
The rollover 401k rules are very straightforward. You send the money from one approved tax shelter to another. There is no time limit on when you can do that. You could have left a job 10 years ago and you’ll still be able to get your old 401k money rolled to your newer 401k account. This is all about you having your money working for you.
When you begin to take the money from the account, the government uses a simple formula to set your minimum withdrawal amount. They take the market value of your account and divide it by your life expectancy. IRAs use a similar (and in many cases identical) formula so you’re not going to gain anything by turning your 401k into an IRA when you retire.
The withdrawal limits help you manage your money for the long term. It is both good and bad. On the one hand, you should be able to manage your money how you want to. On the other hand, Americans have shown themselves to be bad at managing personal finance and so maybe the government is being smart. Maybe they are saving us from ourselves. One way, certainly, to work around these limits, is to have other funds in your portfolio. There is nothing to stop you from investing elsewhere. You should have a retirement account. But you should also have an emergency fund with 3-6 months of expenses. You should have a regular stock market account. Depending on your financial situation, it might not be huge, but it is nice to have money growing for you that is completely under your control. The bottom line is that the rules in place for 401ks are designed to help you use your money wisely. Do your part in helping by saving other money, too. You’ll be glad you did.
Tags: 401k rules, rollover 401k rules, Roth 401k rules
