Your 401(k) Questions,
Finally Answered.

For 2025, the IRS allows employees to contribute up to $23,500 of their own salary. If you are age 50 or older you may make an additional catch-up contribution of $7,500 bringing your maximum to $31,000. The overall limit including employer contributions is $70,000. Those aged 60-63 may contribute a catch-up of up to $11,250.

Almost always yes. Employer matching is the closest thing to a guaranteed instant return you will ever find. If your employer matches 50% up to 6% of salary and you earn $60,000, contributing 6% earns you $1,800 in free money instantly. Not capturing the full match is leaving part of your compensation on the table.

Yes. The IRA limit for 2025 is $7,000 ($8,000 if 50+). However your ability to deduct a traditional IRA contribution may be reduced depending on your income if you participate in a workplace plan.

Excess contributions must be returned via a corrective distribution by April 15th of the following year. You owe income tax on the excess in the year contributed. If not withdrawn by April 15 it becomes subject to double taxation. Contact your plan administrator immediately.

Vesting determines how much of your employer contributions you keep if you leave. Your own contributions are always 100% vested immediately. Employer contributions may follow cliff vesting (0% until a date then 100%) or graded vesting (20% per year over 5 years). Check your schedule before leaving a job.

Withdrawals before age 59.5 are subject to a 10% early withdrawal penalty plus ordinary income taxes. On a $10,000 withdrawal in the 22% bracket you could owe $3,200 total.

Yes. Common exceptions include: separation from service at age 55+, total and permanent disability, death, substantially equal periodic payments (72(t)), qualified domestic relations orders, unreimbursed medical expenses over 7.5% of AGI, and certain military reservist distributions. SECURE 2.0 added new exceptions including emergency distributions up to $1,000/year.

A hardship withdrawal allows access for an immediate heavy financial need and does not need to be repaid but is taxed as income and subject to the 10% penalty. IRS-approved reasons include medical expenses, purchase of a primary residence, tuition, prevention of eviction or foreclosure, funeral expenses, and certain disaster-related home repairs.

Penalty-free distributions begin at age 59.5. The Rule of 55 allows penalty-free distributions from your current employer plan if you separate from service in or after the year you turn 55.

Many plans allow loans up to 50% of your vested balance or $50,000 whichever is less. Loans must be repaid within 5 years through payroll deductions. You pay interest to yourself but repayments are made with after-tax dollars.

The remaining balance typically becomes due within 60-90 days. If you cannot repay it the balance becomes a taxable distribution subject to income taxes plus the 10% penalty if under 59.5.

You have four options: roll into your new employer 401(k), roll into an IRA, leave it with your old employer, or cash it out (almost always the worst option). Always do a direct rollover to avoid mandatory 20% withholding.

Yes - this is a Roth conversion. The amount converted is added to your taxable income for that year. In exchange the money grows tax-free and qualified distributions in retirement are completely tax-free.

Traditional 401(k) contributions are pre-tax and reduce your taxable income dollar-for-dollar. If you earn $75,000 and contribute $10,000 you are only taxed on $65,000. At a 22% rate that saves approximately $2,200 in federal taxes this year.

Distributions from a traditional 401(k) are taxed as ordinary income not at the lower capital gains rate. Roth 401(k) qualified distributions are completely tax-free.

Most states tax withdrawals as ordinary income. States with no income tax include Florida, Texas, Nevada, Washington, Wyoming, Alaska, and South Dakota. Several others offer partial or full exemptions for retirement income.

A target-date fund is an all-in-one fund that automatically shifts from aggressive to conservative as your target retirement year approaches. It is a reasonable set-it-and-forget-it option but check the expense ratio first.

An expense ratio is the annual fund fee as a percentage of assets. Over 30 years a 1% fee difference on a $100,000 portfolio can cost over $200,000 in lost growth. Always favor low-cost index funds with expense ratios below 0.20%.

Under SECURE 2.0 the RMD starting age is now 73 for anyone who turns 72 after December 31 2022. It increases to 75 for those born in 1960 or later. Your first RMD is due by April 1st of the year after you turn 73.

SECURE 2.0 reduced the penalty to 25% of the shortfall or 10% if corrected within two years. Take the distribution as soon as possible and file IRS Form 5329 to request a penalty waiver.

Strong alternatives include: IRA (up to $7,000/year), Solo 401(k) if you have self-employment income (up to $70,000/year), SIMPLE IRA for small employers, HSA with a high-deductible health plan, and taxable brokerage accounts with no contribution limits.

Your 401(k) is very well protected. Under ERISA plan assets must be held in a trust completely separate from company assets. Creditors of a bankrupt employer cannot touch your balance.

Traditional: Pre-tax contributions, taxed on withdrawal. Roth: After-tax contributions, completely tax-free qualified withdrawals. Contribution limits are the same. Many planners recommend splitting between both for tax diversification.

As of 2024 thanks to SECURE 2.0 Roth 401(k) accounts are no longer subject to RMDs during the account owner lifetime. You can let your Roth 401(k) grow untouched as long as you like.

Both conditions must be met: (1) account open at least 5 years and (2) you are at least age 59.5, disabled, or deceased. Your own after-tax contributions can always be withdrawn tax and penalty free.