Problem Set #6

Problem Set #6 - Daniel Paterson Problem Set 6 Chapter 13...

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Daniel Paterson Problem Set 6 Chapter 13 1. Defined contribution plans and defined benefit plans have similar objectives, but are different in important ways. First, employers maintain separate accounts for each employee participating in a defined contribution plan. Second, defined contributions plans specify the up-front contributions the employer will make to the employee’s separate account rather than specifying the ultimate benefit the employee will receive from the plan. Third, employees are frequently allowed to contribute to their own defined contribution plans, and in many instances they contribute more than their employers. Finally, employees are generally free to choose how amounts in their retirement accounts are invested. Defined contribution plans shift the funding responsibility and investment risk from the employer to the employee. 11. The sum of employer and employee contribution to an employee’s defined contribution account(s) is limited to the lesser of (1) $49,000 ($54,500 for employees who are at least 50 years of age by the end of the year) or (2) 100% of the employee’s compensation for the year. Employee contributions to an employee’s 401(k) account are limited to $16,500 (or $22,000 for employees that reach age 50 by the end of the year). This limit applies only to employee contributions while the $49,000 (or $54,500) still applies to the sum of both employee and employer contributions. 17. Any matching programs the employer may have, when the employee will need to have the money distributed, and how the company plans to invest the funds are all nontax factors that an employee should consider 22. Usually an employee will choose a Roth 401(k) plan if they believe there tax rate will increase upon retirement because they always generate after-tax rates of return equal to before- tax rates of return. However, employees generally prefer traditional 401(k) plans if they believe
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Problem Set #6 - Daniel Paterson Problem Set 6 Chapter 13...

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