by T.Yeap

Created on: August 22, 2009   Last Updated: August 23, 2009

401 (K) is an employer sponsored retirement account for their employees as part of their benefits. It's a good way to kick start your retirement savings as most employer will match your contributions up to a certain percentage of your income. Take advantage of it and start saving now. However, there's also several rules that you need to understand before you start enrolling yourself to the plan. Here's a look at the most common rules that usually associated with a 401 (K) account:

ELIGIBILITY & CONTRIBUTION:

Most employees are usually eligible for a 401 (k) plan when they have completed at least one year of service with its company. However, some bigger company are now eliminating that rule and allowing automatic enrollment for their employees once they are hired. You will need to choose to contribute a certain percentage of your income on a pre-tax basis and let the money grow tax deferred until you are ready to retire. It is advice you contribute to the maximum match from your company, usually it's about 6% of your income. Your total contribution may not exceed $16,500 in a year for 2009 and increase $500 for each year there after due to inflation adjustment. However, according to the IRS, if you are 50 years or older, you are allow to have additional $5,500 contribute to your 401(K) plan as a catch-up contributions, making the total contributions to $22,000 before the end of 2009.

WITHDRAWAL RULE

You can request for a lump sum amount of money paid to you less the 20% mandated tax withheld from IRS and also an additional 10% penalty because you withdraw the money before the age of 59 1/2. However, several exception qualify to omit the 10% penalty fees:

a) You've become disabled

b) You are using the money for hardship withdrawal to pay for your debt, a primary house purchase or for tuition fees.

c) You are using the money for medical expenses that are not reimburse to you

d) You've passed away and the money is paid to your beneficiary

LOANS RULE

Most employees are eligible to apply for a loan within their own 401(K) account because you are borrowing your own money to begin with. There's no credit checks and you can borrow up to as much as 50% or maximum of $50,000 of your vested account, whichever is less. You are required to pay back the amount of money in a matter of 5 years but if you are using the money for a home purchase, you can pay it back in a longer period of time. Although the loans provide low interest but you are loosing

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