The Real Value of a 401(k) Plan

We all know putting money aside in a tax deferred account is a good idea.  Businesses should offer these to employees for many reasons, not the least which is that an employee that saves is a good employee.  The cost of administering retirement plans can be daunting.  SIMPLE’s are the cheapest and Defined Contribution plans tend to be the most expense.  The traditional 401(k) plan isn’t always the best bang for the buck, however, these plans pack punch that often go overlooked by the small business owner.  Two great reasons to consider a traditional 401(k) are as follows:


  • The extra $10,000.  In 2014 an employee may contribute up to $17,500 toward their retirement.  But, if your plan is so designed they may then be able to contribute an additional $10,000 as an after tax in-plan IRA contribution.  This additional contribution is without regard to whether or not regard to discrimination testing, short answer, the business owner can also make this contribution!  So a business owner who is also an employee participating in the Company 401(k) plan can contribute up to $39,500 to a retirement plan without having to set up pension and profit sharing plans and be subject to nondiscrimination testing.  Here’s the math for an owner/employee older than 50:


Traditional 401(k) contribution:                                  $17,500

Catch-up 401(k)                                                            5,500

After tax in-plan contribution                                       10,000

     Total 401(k) plan contributions                            $33,000

Traditional self-directed IRA contribution                   $5,500

Catch-up IRA                                                               1,000

     Total IRA contribution                                           $6,500

Total retirement account contributions                    $39,500

 **PLANNING NOTE:  Roll this extra $10,000 over into a self-directed IRA and convert both contributions to a Roth immediately for a $16,500 Roth contribution in spite of earnings limits.


Like it?  Call your financial advisor ASAP!

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