401kGlossary of 401(k) Tax Terms
Short, plain-English definitions for the terms used throughout this site.
Elective deferral
The portion of your paycheck you choose to contribute to a 401(k), before or after tax depending on whether it's traditional or Roth. Subject to the annual employee contribution limit described on the contribution limits page.
Vesting
The process by which employer contributions become permanently yours. Your own contributions are always fully vested immediately. See employer match & vesting.
Required minimum distribution (RMD)
The minimum amount you must withdraw each year from a traditional 401(k) starting at a specific age. See required minimum distributions.
Qualified distribution
A withdrawal that meets all the requirements to receive its intended tax treatment — most often used to describe a Roth 401(k) withdrawal that is completely tax-free because it satisfies both the five-year rule and an age or life-event condition.
Rollover
Moving retirement funds from one qualified account to another (such as from a 401(k) to an IRA) without triggering current income tax, when done according to the rules. See rollover rules.
Hardship withdrawal
A withdrawal permitted for an immediate and heavy financial need while still employed. Fully taxable and not repaid, unlike a loan. See hardship withdrawals.
QDRO (Qualified Domestic Relations Order)
A court order dividing a retirement plan between spouses in a divorce, allowing the receiving spouse to be taxed directly rather than the original account owner. See divorce & QDROs.
Net unrealized appreciation (NUA)
A tax strategy for employer stock held in a 401(k), allowing the stock's growth to be taxed at long-term capital gains rates instead of ordinary income rates. See net unrealized appreciation.
10-year rule
The SECURE Act requirement that most non-spouse beneficiaries fully empty an inherited 401(k) within 10 years of the original owner's death. See inherited 401(k) rules.
Catch-up contribution
An additional contribution amount allowed on top of the standard limit for savers age 50 and older, with a larger amount available for ages 60–63. See catch-up contributions.
Section 415 limit
The overall annual limit on total contributions to a 401(k) from all sources combined — your own deferrals plus all employer contributions. See contribution limits.
Rule of 55
An exception to the 10% early withdrawal penalty allowing penalty-free distributions from your current employer's 401(k) if you separate from service in or after the year you turn 55. See early withdrawal penalty.
Alternate payee
The former spouse or dependent named in a QDRO who has the legal right to receive a portion of a 401(k) participant's account balance.
Designated beneficiary
An individual named to inherit a retirement account, as opposed to an estate, charity, or certain non-qualifying trusts, which are subject to different and often faster distribution rules.
In-service withdrawal
A withdrawal taken from a 401(k) while you are still actively employed by the plan sponsor, permitted only in specific circumstances defined by the plan (such as hardship, reaching a certain age, or after funds have been in the plan a set number of years).
Plan loan offset
The taxable event that occurs when an outstanding 401(k) loan balance is treated as a distribution because it wasn't repaid, typically after leaving the employer. See 401(k) loans.