401(k) Laws: Contribution Limits, Withdrawals, and Vesting

401(k) laws come from two federal statutes working in tandem: the Employee Retirement Income Security Act (ERISA), which sets standards for how employers run the plan and treat participants, and the Internal Revenue Code, which sets contribution limits, tax treatment, and distribution rules.1U.S. Department of Labor. Employee Retirement Income Security Act (ERISA) The IRS enforces the tax-qualification side; the Department of Labor handles reporting, disclosure, and fiduciary compliance.2U.S. Department of Labor. Reporting and Disclosure Guide for Employee Benefit Plans Together they decide how much you can contribute, when you can take money out without a penalty, when you must take money out, and what your employer owes you along the way.

How Much You Can Contribute

For the 2026 calendar year, you can defer up to $24,500 of your salary into a 401(k), whether pre-tax or Roth.3Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026 Go over that amount and the excess plus any earnings on it must be distributed back to you by April 15 of the following year, or you get taxed twice on the same dollars.4Internal Revenue Service. Consequences to a Participant Who Makes Excess Annual Salary Deferrals

Your deferrals plus any employer match or profit-sharing contribution cannot exceed $72,000 for the year, or 100% of your compensation, whichever is less. Only the first $360,000 of your pay counts when the plan calculates benefits.5Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living These figures are adjusted annually for inflation.

Catch-Up Contributions

Turn 50 or older by year-end and you can add another $8,000, taking your personal limit to $32,500. If you are 60 through 63, SECURE 2.0 lets you contribute an enhanced catch-up of $11,250 for 2026, bringing your ceiling to $35,750.6Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions Once you turn 64, the amount drops back to the regular $8,000, so the window is narrow.

The Roth Option

Most plans now offer a Roth 401(k) alongside the traditional account. Roth money goes in after taxes; qualified withdrawals, including all growth, come out tax-free.7Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts To qualify, you must have held the Roth account in that plan for at least five tax years, and be at least 59½, disabled, or deceased.8Office of the Law Revision Counsel. 26 USC 402A – Optional Treatment of Elective Deferrals as Roth Contributions Starting in 2024, Roth 401(k) balances are no longer subject to required minimum distributions during your lifetime, and employers can direct matching contributions into your Roth account if the plan allows it. Those employer Roth contributions become taxable income in the year they are allocated even though no cash reaches you.9Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2

Withdrawing Before Age 59½

Take money out of your 401(k) before age 59½ and you generally owe a 10% additional tax on top of ordinary income tax, which can push your effective rate above 40%.10Internal Revenue Service. Substantially Equal Periodic Payments The 10% penalty is the price of pulling retirement money out early.

Federal law waives the 10% in specific situations:11Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions

  • You leave the employer during or after the year you turn 55 (age 50 for public safety employees) and draw from that employer’s plan.
  • You become totally and permanently disabled.
  • You have unreimbursed medical expenses above 7.5% of your adjusted gross income, up to that excess amount.
  • You set up substantially equal periodic payments based on your life expectancy and continue them for at least five years or until you reach 59½, whichever is later.
  • A court divides your 401(k) in a divorce through a qualified domestic relations order; the alternate payee can receive distributions penalty-free.

These exceptions waive only the extra 10%. Ordinary income tax still applies to any distribution from a traditional 401(k). And if you claim an exception without filing the right forms, the IRS may assess the penalty automatically.

Hardship Withdrawals

If you face a serious and immediate financial need, your plan may allow a hardship withdrawal. Plans do not have to offer them; the plan document controls. When available, the qualifying events are:12Internal Revenue Service. Retirement Topics – Hardship Distributions

  • Medical expenses for you, your spouse, or dependents
  • Costs of purchasing your primary home (but not mortgage payments)
  • Tuition and related education expenses for the next 12 months
  • Payments to prevent eviction or foreclosure on your primary residence
  • Funeral expenses
  • Repair costs for damage to your primary residence

You can only withdraw the amount of the actual need. Hardship money cannot be rolled back into the plan, so it permanently reduces your balance. Income tax applies, and so does the 10% penalty if you are under 59½ and no exception fits.

The $1,000 Emergency Withdrawal

SECURE 2.0 added a smaller, faster option starting in 2024: a penalty-free emergency withdrawal of up to $1,000 per calendar year for unforeseeable personal or family expenses. You self-certify the need. If you do not repay it, you must wait three calendar years before taking another; repay it and you regain access sooner. Your vested balance has to remain above $1,000 after the withdrawal for you to qualify.

Borrowing From Your 401(k)

Many plans let you borrow against your balance instead of taking a distribution. The maximum is the lesser of $50,000 or 50% of your vested balance, with a floor: if your vested balance is $20,000 or less, you can borrow up to $10,000. The $50,000 ceiling is reduced by your highest outstanding loan balance in the prior 12 months, which stops repeated borrow-and-repay cycles.13Internal Revenue Service. Issue Snapshot – Borrowing Limits for Participants With Multiple Plan Loans

Repayment runs for up to five years through substantially level payments made at least quarterly. Loans used to buy a primary home can have a longer repayment period set by the plan.14eCFR. 26 CFR 1.72(p)-1 – Loans Treated as Distributions

The trap is leaving your job with a balance still owed. The unpaid amount becomes a “plan loan offset” and gets treated as a taxable distribution, with the 10% penalty stacked on if you are under 59½. You can avoid that by rolling the offset amount into an IRA or another employer plan by your tax filing deadline (including extensions) for the year the offset happens.15Federal Register. Rollover Rules for Qualified Plan Loan Offset Amounts That extended deadline is a lifeline many people never hear about.

Required Minimum Distributions

Once you reach age 73, the IRS requires you to start pulling money out of your traditional 401(k) each year.16Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs SECURE 2.0 raised the trigger from 72 to 73 for anyone who turned 72 after December 31, 2022, and it will rise again to 75 for those who turn 74 after December 31, 2032.17Congressional Research Service. Required Minimum Distribution (RMD) Rules for Original Owners of Retirement Accounts

If you keep working past RMD age for the employer that sponsors your plan, and you do not own more than 5% of the company, you can delay RMDs from that specific plan until you actually retire. Roth 401(k) accounts are exempt from RMDs during the account owner’s lifetime.

Skip an RMD and you owe a 25% excise tax on the shortfall. Catch the mistake and take the missed distribution within the correction window (generally by the end of the second tax year after the penalty was imposed) and the tax drops to 10%.18Office of the Law Revision Counsel. 26 US Code 4974 – Excise Tax on Certain Accumulations in Qualified Plans

Vesting: When Employer Contributions Are Really Yours

Every dollar you contribute from your paycheck belongs to you the moment it goes in.19Office of the Law Revision Counsel. 26 US Code 411 – Minimum Vesting Standards Employer contributions are different. Federal law gives employers two vesting schedules to choose from:

  • Three-year cliff. You own nothing until you complete three years of service, then jump to 100%.
  • Six-year graded. You vest 20% after two years and pick up another 20% each year until you hit 100% at year six.

Those are the slowest schedules allowed. An employer can vest you faster, never slower.20Internal Revenue Service. Issue Snapshot – Vesting Schedules for Matching Contributions Your plan’s Summary Plan Description shows which one applies. Before you give notice at a job, check where you stand: a few extra months of service can put you over a cliff worth thousands.

Leaving a Job: Your Rollover Options

When you separate from an employer, you generally have four paths for your balance:

  • Leave it in the old plan. Most plans allow this if your balance exceeds $7,000. Below $1,000, many plans will cash you out automatically.
  • Roll it to your new employer’s plan through a direct rollover. No withholding, no tax event.
  • Roll it to an IRA. Broader investment choices and often lower fees.
  • Cash it out. The plan withholds 20% for federal taxes, and the 10% penalty hits if you are under 59½. Almost always the worst option.

A direct rollover, where the funds move plan-to-plan without passing through your hands, is the cleanest route. If instead the check comes to you, you have 60 days to deposit it into an IRA or another qualified plan; miss that window and the whole amount becomes taxable, potentially with the 10% penalty.21Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions There is a second complication with indirect rollovers: the plan must withhold 20% before cutting your check. To roll over the full original amount, you have to supply that 20% from other funds and deposit the whole sum within 60 days. Anything you do not deposit counts as a distribution.

Automatic Enrollment in Newer Plans

SECURE 2.0 requires most 401(k) plans established after December 29, 2022, to automatically enroll eligible employees, effective for plan years beginning on or after January 1, 2025. If your employer’s plan falls under this rule, you are in unless you opt out.

The default contribution rate must land between 3% and 10% of gross pay, and it must escalate by 1 percentage point each year until it reaches at least 10% but no more than 15%. You can change your rate or opt out at any time.

Several employers are exempt from the mandate:

  • Businesses in existence fewer than three years
  • Businesses that normally employ 10 or fewer workers
  • Church plans and governmental plans
  • SIMPLE 401(k) plans

Plans that existed before December 29, 2022, are grandfathered. Separately, employers can now offer small financial incentives (up to $250 in value, and not from plan assets) to encourage non-participants to enroll.

What Your Employer Owes You

Anyone who has discretionary control over your plan’s investments or administration is a fiduciary under ERISA. Fiduciaries must manage the plan with the care and skill a knowledgeable person would use, act solely in participants’ interests, and avoid self-dealing. Personal liability follows a breach.1U.S. Department of Labor. Employee Retirement Income Security Act (ERISA)

The duty is ongoing. In Tibble v. Edison International, the Supreme Court held that fiduciaries must continually monitor investments and remove options that become imprudent.22Justia. Tibble v. Edison International, 575 U.S. 523 (2015) Chronically expensive or underperforming funds are among the most common triggers for participant lawsuits.

Fees have to be visible. Under DOL Rule 408(b)(2), service providers must disclose their direct and indirect compensation to plan fiduciaries.23U.S. Department of Labor. Fact Sheet – Service Provider Disclosure Regulation And under DOL regulation 404a-5, you must receive investment and fee information at least annually, plus quarterly statements showing the actual dollar amounts deducted from your account.24eCFR. 29 CFR 2550.404a-5 – Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans Read those disclosures. Small differences in expense ratios compound heavily over a 30-year career, and the numbers are on the statement precisely so you can compare them.