Increasing Your 401(K) Contributions From $16,500 To $250,000 Per Year
Did you know that if you design your 401(K) plan a certain way, you can increase how much deferred income you can invest into your retirement savings plan.
Well, I am going to provide you with some very exciting information, but before I do that I wanted to touch on a little bit about our future retirement situation.
Our nation is on the verge of losing social security and it is imperative today to start thinking about how we are going to finance our retirement without it.
Now most of us know that social security was actually formed to be a supplement to our retirement and not our main resource for retirement.
We also know that many employers provide 401(K) plans for their employees which assists the employees in planning for their retirement.
The name 401(K) is the section of the Internal Revenue Code where as it stipulates that employees can set aside tax deferred income for retirement.
Today, we can invest into our 401(K)'s plan up to $16,500.
00 per year.
This amount is based on ERISA guideline section 402(g) which is the section of the Internal Revenue code that limits contributions into company pension plans.
However, there is a catch-up clause for individual participants over the age of 50 to increase their contributions by adding an additional $5,500.
00 on top of their $16,500.
00 per year contributions.
Sounds pretty generous, huh? Well, there is more..
..
In addition to ERISA section 402(g), which is also known as"Defined Contribution", there is an additional "Profit-Sharing" plan that you can add to your company's Defined Contribution plan.
This Profit Sharing arrangement allows for additional funds to go into a separate account under different rules.
Rule 2e bases the profit-sharing on either "pro-rata", where an additional contribution will be set aside for each employee based on their compensation or "integrated" with social security, the formula for this may integrate an employees compensation with the social security taxable wage base.
The formula results in a larger percentage allocated to eligible employees earning more than the taxable wage base or a certain percentage thereof.
Then you have rule 2a which uses either an "age weighted" formula that takes into account each employee's age and compensation.
The age weighted formula results in larger allocations of the contributions to employees who are closer to retirement.
Additionally, this formula combines the flexibility of a profit sharing plan with the ability of a pension plan to benefit or favor older employees.
The second part of 2a is the "new comparability", also referred to as "cross tested plans" where the profit-sharing plan is tested for non-discrimination as though it was a defined benefit plan which allows certain employees to receive much higher allocations than typically permitted by standard nondiscrimination testing because an employer can now determine and define certain groups, each receiving different allocations.
New comparability plans are generally utilized by small businesses that want to maximize contributions to owners and higher paid employees while minimizing those for all other employees.
As you can see, there is an amazing opportunity to increase your overall contributions into a retirement savings plan and prepare for a more enriched retirement.
Above we discussed the basic defined contribution plan that allows tax deferred savings of up to $16,500 or $22,000 if over the age of fifty, then we added a profit-sharing plan to augment the overall contribution savings and now we are going to delve into a category that is very beneficial to small groups such as doctor groups, attorney groups or highly paid executive groups.
By adding a "Defined Benefit" plan or "Cash Balance" to your current 401(K) plan, you can potentially contribute up to a total of $250,000.
00 per year on a tax deferred basis.
A "Defined Benefit" plan is a separate company retirement plan such as a pension plan whereas the employer will set aside a specific sum of money that will be allocated for retired employees based on the history of the salary and the amount of years the employee provided their employer.
So to sum up, what you as a plan sponsor, can provide to your highly paid employees is as follows in a more quantifiable formula: Defined Contribution + (up to 3% match) + Profit Sharing + Defined Benefit = Total Retirement Savings Per Year or retirement savings of up to $250,000.
00 per year.
Well, I am going to provide you with some very exciting information, but before I do that I wanted to touch on a little bit about our future retirement situation.
Our nation is on the verge of losing social security and it is imperative today to start thinking about how we are going to finance our retirement without it.
Now most of us know that social security was actually formed to be a supplement to our retirement and not our main resource for retirement.
We also know that many employers provide 401(K) plans for their employees which assists the employees in planning for their retirement.
The name 401(K) is the section of the Internal Revenue Code where as it stipulates that employees can set aside tax deferred income for retirement.
Today, we can invest into our 401(K)'s plan up to $16,500.
00 per year.
This amount is based on ERISA guideline section 402(g) which is the section of the Internal Revenue code that limits contributions into company pension plans.
However, there is a catch-up clause for individual participants over the age of 50 to increase their contributions by adding an additional $5,500.
00 on top of their $16,500.
00 per year contributions.
Sounds pretty generous, huh? Well, there is more..
..
In addition to ERISA section 402(g), which is also known as"Defined Contribution", there is an additional "Profit-Sharing" plan that you can add to your company's Defined Contribution plan.
This Profit Sharing arrangement allows for additional funds to go into a separate account under different rules.
Rule 2e bases the profit-sharing on either "pro-rata", where an additional contribution will be set aside for each employee based on their compensation or "integrated" with social security, the formula for this may integrate an employees compensation with the social security taxable wage base.
The formula results in a larger percentage allocated to eligible employees earning more than the taxable wage base or a certain percentage thereof.
Then you have rule 2a which uses either an "age weighted" formula that takes into account each employee's age and compensation.
The age weighted formula results in larger allocations of the contributions to employees who are closer to retirement.
Additionally, this formula combines the flexibility of a profit sharing plan with the ability of a pension plan to benefit or favor older employees.
The second part of 2a is the "new comparability", also referred to as "cross tested plans" where the profit-sharing plan is tested for non-discrimination as though it was a defined benefit plan which allows certain employees to receive much higher allocations than typically permitted by standard nondiscrimination testing because an employer can now determine and define certain groups, each receiving different allocations.
New comparability plans are generally utilized by small businesses that want to maximize contributions to owners and higher paid employees while minimizing those for all other employees.
As you can see, there is an amazing opportunity to increase your overall contributions into a retirement savings plan and prepare for a more enriched retirement.
Above we discussed the basic defined contribution plan that allows tax deferred savings of up to $16,500 or $22,000 if over the age of fifty, then we added a profit-sharing plan to augment the overall contribution savings and now we are going to delve into a category that is very beneficial to small groups such as doctor groups, attorney groups or highly paid executive groups.
By adding a "Defined Benefit" plan or "Cash Balance" to your current 401(K) plan, you can potentially contribute up to a total of $250,000.
00 per year on a tax deferred basis.
A "Defined Benefit" plan is a separate company retirement plan such as a pension plan whereas the employer will set aside a specific sum of money that will be allocated for retired employees based on the history of the salary and the amount of years the employee provided their employer.
So to sum up, what you as a plan sponsor, can provide to your highly paid employees is as follows in a more quantifiable formula: Defined Contribution + (up to 3% match) + Profit Sharing + Defined Benefit = Total Retirement Savings Per Year or retirement savings of up to $250,000.
00 per year.