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 25% of compensation or $56,000 including employee contributions for 2019.
Employee (Salary Deferral):
Up to 100% of compensation or for a maximum of $19,000 ($25,000 if over age 50) for 2019.
The total combination of employer and employee (salary deferral) contributions may not exceed $56,000 ($62,000 if over age 50) for 2019.
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have the potential to grow tax deferred and may be eligible for income tax free withdrawals if held for five years and withdrawn after age 59½.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Pre-tax contributions and earnings are taxed as ordinary income when withdrawn. Roth contributions are withdrawn tax-free.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 which may vary based on the retirement platform the plan is on.
Withdrawal Penalties
10% IRS early withdrawal penalty if withdrawn before age 59½ unless exception applies.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
Required Withdrawals
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 plan 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
