IRS - 401(k) plans

A 401(k) plan is a qualified deferred compensation plan that allows eligible employees to contribute a portion of their compensation on a pretax basis. These contributions, known as elective contributions, are not subject to income tax withholding at the time of deferral and are not reported as wages on Form 1040 or Form 1040-SR. However, they are subject to Social Security and Medicare taxes, and employers must report them as wages subject to federal unemployment taxes. Some plans also allow after-tax contributions, known as designated Roth contributions.

The Internal Revenue Code places limits on the amount an employee may elect to defer in a 401(k) plan. These limits may also be subject to plan-specific restrictions. Elective contributions are reported in Box 12 of Form W-2. For more details:

401(k) plans specify how distributions are made. Some distributions may qualify for lump-sum distribution treatment or rollover treatment if they meet specific requirements. To determine if a distribution is taxable, consult:

Many 401(k) plans allow hardship withdrawals for immediate and heavy financial needs. Historically, hardship distributions were limited to the amount of elective contributions and did not include earnings on those contributions. However, since 2019, plans may allow withdrawals from additional funds. Hardship withdrawals cannot be rolled over.

If you take a 401(k) distribution before age 59½, it may be subject to an additional 10% tax, unless an exception applies. This applies to hardship withdrawals as well. For more information:

Understanding these rules can help you effectively manage your 401(k) plan and plan for a financially secure retirement.