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401(k) Plans

When considering a 401(k) plan for employees, keep in mind this flexible plan offering provides the highest level of employee pre-tax or Roth contributions, a wide range of employer contribution options, and an optional loan provision.

Eligibility to Contribute

Companies of all sizes and structures 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 the lesser of 25% of compensation or $66,000 including employee contributions for 2023.
  • Employee (Salary Deferral): Up to the lesser of 100% of compensation or for a maximum of $22,500 ($30,000 if age 50 or older) for 2023.
  • The total combination of employer and employee (salary deferral) contributions may not exceed $66,000 ($73,500 if age 50 or older) for 2023.

Tax-Deductible Contributions

  • 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 have the potential to grow tax deferred and may be eligible for income tax free withdrawals if held for five years and withdrawn after age 59½.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Pre-tax contributions and earnings are taxed as ordinary income when withdrawn. Roth contributions are withdrawn tax-free. Roth earnings are tax-free if the withdrawal is considered a qualified distribution.

Types of Investments

Generally a broad array of mutual funds or other investments which may vary based on the retirement platform the plan is on.

Withdrawal Penalties

10% IRS additional tax if withdrawn before age 59½ unless exception applies.

Some exceptions:

  • Separation of service in the year attaining age 55 or older.
  • Death
  • Disability
  • Substantially equal periodic payments made over life expectancy
  • Qualified military reservist
  • Qualified domestic relations order due to divorce
  • Up to $5,000 for qualified adoption/birth expenses

Required Withdrawals

Beginning in tax year 2020, the age to start Required Minimum Distributions (RMDs) has been modified from age 70½ to age 72 (Does not affect participants who turned 70½ on or before 12/31/2019.) If you are still employed by the employer sponsoring this plan, RMDs may be delayed until the year of retirement (some exceptions apply.).

Deadline to Set Up and Fund

  • For taxable years 2020 and beyond, 401(k) plans may be set up by tax filing deadlines plus extensions.
  • 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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