All retirement compensation plans are required to follow the rules enacted in 1974 by the Employee Retirement Income Security Act (ERISA) in order to be considered “qualified” by the IRS at tax time. Generally, most 401(k) plans meet these requirements and is considered a qualifying plan as far as your taxes are concerned.
Your employer contributes a specified percentage of pretax wages to your 401(k) plan, known as elective contributions. Since it is not taxed when it is put into the account, you aren’t required to report it as income on your Form 1040. However, 401(k) contributions are subject to Social Security and Medicare taxation, and your employer must report them as necessary for federal unemployment taxation regulation.
Limitations to elective contributions are applied by both the IRS and your specific 401(k) plan. You’ll find the amount of your contribution on line 12 of your W-2. When the time comes for distribution, you can either choose to accept a lump sum, or roll your funds over into another account, provided certain conditions are met.
Most 401(k) plans have a “hardship” clause that allows for withdrawals limited to the amount your employer contributed. Any income earned on the amount deferred isn’t eligible for hardship withdrawal or eligible for a rollover distribution.
You can be subject to additional taxes of 10% if you withdraw funds from your 401(k) before the age of 59 ½, even if it’s considered a hardship withdrawal. Be sure to check all the conditions of withdrawal and how it will affect your taxes before tapping into your 401(k).