When considering a 401(k) plan for employees, keep in mind this flexible plan offering provides the highest level of employee pre-tax contributions, a wide range of employer contribution options, and an optional loan provision.
Eligibility to Contribute
Companies of all size and structure can offer this type of retirement plan. Employee eligibility requirements are set at the time the plan is established.
Maximum Annual Contribution
- Employer: Profit sharing and match: Up to 25% of compensation or $53,000 including employee contributions for 2015.
- Employee (Salary Deferral): Up to 100% of compensation or $18,000 ($24,000 if over age 50) for 2015.
- The total combination of employer and employee (salary deferral) contributions may not exceed $53,000 ($59,000 if over age 50) for 2015.
- Employers can deduct contributions from federal taxable income.
- Employees can make pre-tax contributions.
Your plan may allow you to allocate part or all of your employee deferral to a Roth 401(k). Roth 401(k) salary deferrals are not tax deductible but contributions and earnings grow tax deferred and may be eligible for income tax free withdrawals if held for five years and withdrawn after age 59½.
Taxation of Earnings and Withdrawals
Pre-tax contributions and earnings are taxed as ordinary income when withdrawn.
Types of Investments
Broad array of mutual funds.
10% IRS early withdrawal penalty if withdrawn before age 59½ unless exception applies.
- Separation of service after reaching age 55
- Substantially equal payments made over life expectancy
- Qualified military reservist
Must begin at age 70½ for those no longer working for the employer. (Note some exceptions may apply.)
Deadline to Set Up and Fund
- Plan must be established by the last day of the business’ fiscal year. (Note that it may take up to 90 days to establish a plan.)
- Salary deferral portion of the contribution must be deducted from participants’ paychecks.
- Employer contribution may be made through the business’ tax filing due date plus extensions.
Commissions and Fees
Vary by mutual fund family
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