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For many Americans their 401k plan is the most powerful vehicle in their retirement garage. According to recent estimates, only about 5% of people max out their 401k contributions, but according to the Federal Bureau of Labor Statistics, only 21% of workers in America are covered by traditional employer sponsored pension plans. I'll bet that among younger employees, the percentage covered by such pension plans is far lower. The new employer sponsored retirement vehicle of choice is the 401k, which be employer sponsored. If so few are maxing out their 401k contributions, what are they thinking will provide for them in their retirement years?

Just what are the limits you're subject to when contributing, withdrawing or rolling over a 401k plan anyway?

401k Contribution Limits:
For 2008, according to IRS rules you can contribute a maximum of $15,500 to your 401k plan. If you're one of the 95% who failed to contribute the maximum amount to the plan in prior years, the IRS allows you to contribute a “catch up” amount, which for 2008 is $5,000. You must be over 50 to take advantage of the catch up contribution. Any employer matching funds are not included in the IRS contribution limits. So, if you're contributing the maximum of $15,500 and your employer provides 50% matching funds, their $7,750 is over and above the limit, so your effective limit for 2008 is $23,250.

401k Rollover Limits:
You're not limited on the dollar amount for 401k rollovers, as you are with contributions, however you can only roll over once every 12 months. Unless you're a rabid job changer, this shouldn't present too much of a barrier.

401k Withdrawal Limits:
There are several limits placed upon your ability to withdraw the funds in your 401k. You can't just retire, pull out the entire lump sum, and head for the Caribbean. Well, you could, but you would be faced with severe financial penalties for doing so.

Withdrawal Age - There age limits for 401k withdrawals. Currently, you must be 59-1/2 years of age to begin withdrawal of funds, unless you are rolling over into another IRS approved financial vehicle such as an IRA. You are also allowed to withdraw funds before age 59-1/2 to avoid foreclosure if you meet the terms of IRS section 213. I recently did a post covering early withdrawal and other 401k hardship withdrawals. You must also begin withdrawal from your 401k by age 70-1/2 if you have not already begun doing so, unless you are still working for the employer sponsoring the 401k. The post 70-1/2 withdrawals must meet IRS mandated minimums, currently defined by tables and based on life expectancy. Failure to take the post 70-1/2 withdrawals triggers a whopping 50% (of the mandated withdrawal amount) IRS penalty, so take the money out)

Withdrawal Amount - There are currently no limits on how much you can take out, but remember withdrawals are taxable events. The IRS allows you to take the entire amount of the 401k, but it is taxed as ordinary income and reported as such on your form 1040, so the more your take out, the higher tax bracket in which you place yourself. If you were born before 1936, you meet special rules, including the ability to average a lump sum distribution over 10 years. See your tax professional if you were born when Roosevelt (either one) was President.