The Real Value of a 401(k) Plan

401k

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 of which is that an employee that saves is a good employee. However, the cost of administering retirement plans can be daunting. SIMPLE’s are the cheapest and Defined Contribution plans tend to be the most expensive. The traditional 401(k) plan isn’t always the best bang for the buck-however, these plans pack a punch that often go overlooked by the small business owner. A great reason to consider a traditional 401(k) is the extra $10,000:

  • In 2016, an employee may contribute up to $18,000 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 discrimination testing so 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 $40,500 to a retirement plan without having to set up pension and profit sharing plans and be subject to discrimination testing. Here’s the math for an owner/employee older than 50:
    • Traditional 401(k) contribution: $18,000
    • Catch-up 401(k): $6,000
    • After tax in-plan contribution: $10,000
    • Total 401(k) plan contributions: $34,000
    • Traditional self-directed IRA contribution: $5,500
    • Catch-up IRA: $1,000
    • Total IRA contribution: $6,500
    • Total retirement account contributions: $40,500

PLANNING NOTE: Roll the $10,000 and the $6,500 contributions to a Roth immediately for a $16,500 Roth contribution in spite of earnings limits.

If you have any questions please call our office, 314-993-4285.

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