What Is a 401(k)? A Quick Guide to the Most Common U.S. Retirement Savings Account
A 401(k) is an employer-sponsored retirement savings plan that allows you to save for the future with valuable tax advantages.
1. Two Types of 401(k) Plans
Traditional 401(k):
- Contributions are made with pre-tax income
- Lowers your taxable income for the year
- Withdrawals in retirement are taxed
Roth 401(k):
- Contributions are made with after-tax income
- Tax-free withdrawals in retirement
2. Withdrawal Rules and Penalties
Traditional 401(k):
- Withdrawals before age 59.5 → generally subject to a 10% early withdrawal penalty
- At age 59.5 or older → free to withdraw without penalties
- At age 72 (or 73) → Required Minimum Distributions (RMDs) must begin; failing to take RMDs may result in penalties
Roth 401(k):
- Withdrawals before age 59.5 → Usually subject to a 10% penalty.
- If the Roth 401(k) account has been open for at least 5 years, earnings can be withdrawn tax-free; otherwise, the earnings portion is subject to income tax.
- Starting at age 72 (or 73) → Required Minimum Distributions (RMDs) apply, and failure to withdraw may result in penalties.
3. Annual Contribution Limits (2026)
- Individual annual limit: $24,500
- Age 50 or older: additional $8,000 Catch-Up contribution allowed
USCPA Sophie Luo (羅霞) reminds you Before making any retirement account withdrawals or planning decisions, be sure to understand the related tax implications and penalties to avoid unnecessary costs.
If you have any questions or need any further help,
please contact us at the USCPA Sophie Luo (羅霞) +886 980919600
or Email: ustaxproservice@gmail.com
Also welcome to visit our website: https://www.ustaxproservice.com
(USTAX Service LLC)