Module 1 - An Overview of Retirement Planning.docx

The employers matching contribution must only factor

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The employer’s matching contribution must only factor wages earned up to the IRS cap of $275,000 (2018 limit) (Links to an external site.)Links to an external site. . Total contributions from salary deferral and employer match cannot exceed the 415(c) limit. Consider someone who makes $400,000 per year. Their employer will match 50% up to a max salary deferral of 6%...if the participant contributes 6% then the employer will contribute 3% (if the employee only defers 4% then the employer will only match 2% due to the 50% rule self-selected by the employer). With a 401(k), the participant's salary deferral is limited to $18,500 (2018 limit). Without this limit, the employee earning $400,000 annually would have contributed $24,000 ($400,000 x 6% = $24,000). If they are older than 50, then they could contribute the full $24,000 because of the extra buffer of the $6,000 catch up contribution as described above. The employer will match at 3%, but the salary limit on this is $275,000 (2018 limit) . This means that the most that the employer could contribute as a matching contribution is $8,250 (3% x $275,000 [2018 IRS compensation cap]). If this employee is under age 50, then their maximum 401(k) addition for the current year is $26,750 ($18,500 + $8,250 = $26,750). If this employee is older than age 50, then their maximum 401(k) addition for the current year is $32,750 ($18,500 +$6,000 + $8,250 = $32,750). How could the employer contribute more? The employer could add a Profit Sharing Plan to their retirement plan offering and bring their total contribution up to a total of $55,000 (2018 limit) or $61,000 (2018 limit) if the additional $6,000 catch up is in play due to being over age 50. Recall that the catchup extends beyond the 415(c) limit.
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Most 401(k)s offer a series of mutual funds from which participants may choose. Some funds offer education on investment allocation, while others leave the participant to their own fate. Some 401(k)s also offer something called a brokerage window, which is simply the opportunity to switch some of the participant’s funds out of the constraints of the limited pool of investments offered within the 401(k) and into a brokerage account (perhaps at Charles Schwab or TD Ameritrade) where the participant can purchase stocks or ETFs with their 401(k) assets. As we move forward in human history, the 401(k) will likely be an area that experiences changes. Some employers have stopped offering matching incentives. Others, like IBM, have not gone this far but have decided to materially alter the plan's operations going forward (Links to an external site.)Links to an external site. . Some sole-proprietors (business owners) are interested in the 401(k) concept, but they do not want to deal with all of the compliance testing and monitoring costs that come standard with a 401(k). If they have other employees, then the best option might be a SIMPLE plan that you will learn about in Module 1: Lesson 6. However, if they are the sole employee of the company, then the solution for them is called a solo-401(k) (sometimes called a uni-k). This enables them to contribute up to $18,500 (2018 limit) into their own 401(k) account and then their employer (themselves) can contribute an additional amount up to the 415(c) limit.
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