This year, in 2009, Congress approved legislation for people over age 70, whose retirement plans have taken a beating by the market. This bill will give somewhat relief for those individuals. The bill suspends the minimum 401k distribution rules that force withdrawals from 401k plans in 2009. The change didn’t affect 2008 401k distribution rules, although there might be a chance the U.S. Treasury may yet take action on that front.

The required 401k distribution rule minimum for a year is calculated against your end-of-year balance the previous year; this year, the withdrawal would have been geared to the higher market valuations that prevailed at the end of 2007–another typical hit for investors whose accounts have been decimated this year. This can push investors into a high tax bracket for taking the distribution. Also, if you fail to take the distribution, you’ll pay a steep 50 percent penalty on the amount you should have withdrawn but didn’t.

401k distribution rules are important to take note of. There is a federally-mandated maximum contribution limit for 401k plans. In 2009, the 401k limit is $16,500. If you are under 50, this is the maximum amount you can contribute to your 401k plan. If you are 50 that same year or older, you can make a catch-up contribution of $5,000.

You can only contribute to your 401k through payroll deduction. You are not allowed to invest in your 401k any other way. Employers are allowed to contribute to your 401k plan on your behalf. Many employers, customarily, have a matching program where they contribute a certain amount that is based on your contribution. Your employer will match your contributions by 50%, for example. So, in that case, if you contribute $600 a month, your employer would contribute $300 a month as well.

Although income contributed to your 401k is not federally taxed until it is withdrawn, it is subject to several other taxes including social security, Medicare, and federal unemployment taxes.

In most cases, distributions of elective deferrals cannot be made until one of the following occurs: The participant dies, becomes disabled, or otherwise has been terminated from employment, the plan ends and no successor defined contribution plan is produced or maintained by the employer and the participant reaches age 59 ½ or incurs a financial hardship.

Depending on the terms of the plan, distributions may be nonperiodic. This would be a lump sum distribution or periodic, such as installment payments or annuity. In certain situations, the plan administrator must acquire the participant’s approval or consent before making a distribution. Consent is required if the participant’s account balance exceeds $5,000.

401k distribution rules also require that each participant must provide the following: Receive his or her entire benefits in the plan by the required beginning date, or begin receiving regular periodic distributions by the required beginning date in annual amounts calculated to distribute the participant’s entire benefits over his or her life expectancy or over the joint life expectancy of the participant and the designated beneficiary. Know the 401k distribution rules.