What Are 401k Taxes?

If an employer wants to offer its employees a chance to save for their future, it often does so in the form of retirement plans such as 401k. According to the Internal Revenue Service (IRS), 401k plans are subject to certain income tax withholdings.

Traditional 401k

A traditional 401k plan allows an employee to make 401k contributions without being taxed at the time of contribution. However, contributions are added to income subject to Federal Insurance Contributions Act and Federal Unemployment Tax Act taxes.

Roth 401k

Some employers allow Roth 401k contributions, which are post-taxed--contributions that are disbursed after taxes are withheld.

Employer Filing

Employers with a qualified retirement plan are generally required to file a form 5500 or 5500-EZ with the IRS and the Department of Labor annually.

Early Withdrawal

If an employee withdraws from the plan before age 59 ½, he may have to pay a 10 percent early withdrawal fine to the IRS.

Contribution Limit

The IRS imposes a limit on how much you can contribute to your traditional 401k plan yearly. For 2009 and 2010, the limit is $16,500; if you are over age 50, you are allowed an additional $5,500 catch-up.

References

• IRS: 401(k) Plans
• Charles Schwab: Information About Form 5500
• IRS: 401(k) Resource Guide - Plan Participants - Limitation on Elective Deferrals