Download - 401ks & Qualified Plans
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401ks & Qualified Plans
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PLEASE DO NOW…
On Socrative, please answer the following
question:
1.Name all of the possible sources of your
retirement income you will receive in the
future.
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TODAY’S GOALS
• What is a Qualified Plan?
• Why should we establish a 401k plan?
• How do we contribute to a 401k plan?
• What is an ESOP?
• What is Matching & Vesting?
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INVESTMENT MANAGEMENT STANDARD(S)
Achievement Standard: Evaluate savings and investment options to meet short and long-term goals.
Achievement Standard: Evaluate services provided by financial deposit institutions to transfer funds.
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DEFINITIONS TO KNOW
• Vesting
• Matching
• 401k Plan
• Defined Benefit Plan
• Defined Contribution Plan
• Distributions
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WHAT IS A QUALIFIED PLAN?
A retirement account established by the employer for the benefit of the employee.
Allows the employer a tax deduction for contributing to the plan.
Employees make contributions on a pre-tax basis and earnings are invested and grow tax-deferred.
Employees cannot take distributions (withdrawals) until he or she reaches age 59 ½.
Employees are required to take distributions at age 70 ½ (Required Minimum Distributions or RMDs).
There are 2 types of qualified plans:
1.Defined Benefit - Employer makes contributions, benefits guaranteed (e.g., PENSION PLAN).
2.Defined Contribution - Employee makes contributions, employer can make contributions, no guarantees (e.g., 401k Plan).
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401k PLAN EXAMPLE
Here is an example of contributing on a pre-tax basis:Assume you earn $40,000 per year and pay 25% in income taxes. If you contribute $6,000 of that to your 401k, you won’t have to pay tax on the $6,000. CONTRIBUTE TO 401k DO NOT CONTRIBUTE TO 401k
Gross Salary $40,000
Gross Salary $40,000
401k Contributions -$6,000
401k Contributions - 0
Taxable Income $34,000
Taxable Income $40,000
Income Tax Rate x 25%
Income Tax Rate x 25%
Income Tax Paid $8,500
Income Tax Paid $10,000
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To provide retirement income for ourselves and our families.
To defer paying taxes.
401ks allow you to take a loan from your account (NOT A SMART MOVE)
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WHY SHOULD WE ESTABLISH A 401k PLAN?
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Your contributions simply come out of your paycheck, on a pre-tax basis.
Example: Patty earns $80,000 a year working for Microsoft as a computer programmer. She contributes 13% of her salary to her 401k plan. How much, in dollars, does she contribute each MONTH to her 401k plan?
Monthly Contributions to 401k= (Salary * % Contribution)/12
Monthly Contributions to 401k= ($80,000 * 13%)/12
Monthly Contributions to 401k= $866.67 per month
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HOW DO WE CONTRIBUTE TO A 401k PLAN?
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WHAT IS AN ESOP?
Employee Stock Ownership Plan
A defined contribution plan by which the investments are primarily in the employer’s stock.
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WHAT IS MATCHING & VESTING?
Matching is a type of contribution an employer chooses to make to an
employee’s 401k plan.
•The employee’s maximum contribution in 2013 = $17,500•On average, employers MATCH between 0-6% of the employee’s salary.•The combined contribution amount cannot exceed $51,000.
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WHAT IS MATCHING & VESTING?
For Example:CONTRIBUTE TO 401k DO NOT CONTRIBUTE TO 401k
Gross Salary $50,000
Gross Salary $50,000
401k Contributions $6,000
401k Contributions $0
Employer Match $3,000 50% Match or 6% of salary
Employer Match +$0
Total Contributions $9,000
Total Contributions $0
$3,000 in FREE Money that you can invest!!
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WHAT IS MATCHING & VESTING? (Cont’d)
VESTING is the process by which the employee earns a non-forfeitable right to benefits funded
by employer contributions.
Employees are always 100% vested in their own contributions.
Employees are usually 100% vested in employer contributions after 3+ years.
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LET’S PRACTICE…
Mike is 40% vested in his 401k plan. The employer’s contribution represents $10,500 of the total value of the plan. His contributions represent $50,000 of the total value of the plan. What is the total VESTED value of his 401k ? Solution:
Vested Value of 401(k) = (% vested * employer contribution) + Total value of employee contributions
Vested Value of 401(k) = (40% * $10,500) + $50,000
Vested Value of 401(k) = $54,200
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A LOOK AHEAD……
SEP Plans
Case Study #4
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QUESTIONS???