401(k) Tax Rules: Contributions, Withdrawals, and Penalties

2024 contribution limits

• Employee deferral: $23,000
• Age 50+ catch-up: extra $7,500 ($30,500 total)
• Total combined (employee + employer): $69,000 ($76,500 with catch-up)

Traditional vs Roth 401(k)

Same difference as IRAs:

• Traditional — pre-tax now, taxed in retirement
• Roth — after-tax now, tax-free in retirement

Most modern employer plans offer both. Unlike Roth IRAs, Roth 401(k)s have no income limit.

The match is free money

If your employer matches 100% on the first 4%, contribute at least 4%. Skipping the match is a guaranteed 100% loss on your retirement savings. Vesting schedules can delay your access to the match — read the plan document.

Early withdrawal penalty

Withdraw before age 59½ and you owe ordinary income tax plus a 10% penalty. Exceptions include:

• Death or total disability
• Separation from service in or after the year you turn 55 (rule of 55)
• Substantially equal periodic payments (72(t))
• Up to $5,000 for birth/adoption
• Medical expenses over 7.5% of AGI

401(k) loans

Most plans let you borrow up to 50% of vested balance, max $50,000. You pay yourself back with interest. Risk: leave the job and the loan typically becomes due — unpaid balance treated as a taxable distribution.

Rollovers

When you leave a job: roll to an IRA, roll to a new 401(k), leave it, or cash out. Direct rollovers (trustee-to-trustee) avoid the mandatory 20% withholding that hits indirect rollovers.

Required Minimum Distributions (RMDs)

Traditional 401(k)s require RMDs starting at age 73 (SECURE Act 2.0). Roth 401(k)s no longer require RMDs during the owner's lifetime as of 2024. Miss an RMD and the penalty is 25% of the missed amount (reduced to 10% if corrected promptly).