401k Basics

• A 401k plan allows employees to make pre-tax contributions to a retirement savings account via salary deferral. In addition, employers can make contributions on behalf of the employee to the account via either matching or a direct profit-sharing contribution. Money inside of the 401k grows tax deferred until withdrawn. Funds withdrawn from a 401k are taxed as ordinary income. For people under 59-and-a-half an additional 10 percent tax penalty may also apply to any withdrawals.
  
  

IRA Basics

• An IRA is an Individual Retirement Arrangement. Like 401k plans, money inside of an IRA grows tax deferred while held within the account. Also like 401k plans, money withdrawn from an IRA is taxed as ordinary income and those withdrawing funds before age 59-and-a-half may pay a 10-percent penalty. Unlike a 401k account, contributions are made directly into an IRA by the account owner. For some taxpayers IRA contributions may be tax deductible.
  
  

IRA Contribution Limits

• In 2011, the maximum amount that can be put into an IRA each year is $5,000. IRA owners age 50 and older may contribute an additional $1,000 each year for a total contribution of $6,000 annually. The contribution limit does not apply to money properly rolled over from another qualified retirement plan.
  
  

401k Rollovers to an IRA

• Funds may be transferred from a 401k to an IRA via a rollover. To qualify as a rollover, all funds withdrawn from the 401k must be deposited into an IRA within 60 days. A rollover is a tax-free event. No part of the withdrawal from the 401k is considered income. Since no income is generated and federal law makes all funds within both 401k plans and IRAs exempt from taxes, no federal or state taxes are due when a rollover occurs.