Profit Sharing And Savings Plan Business Finance Case Study

User Generated

znmra944

Business Finance

Description

see the attachment and feel free to ask me the questions will be based on the 555 file

Unformatted Attachment Preview

Profit Sharing and Savings Plans • Profit Sharing Plans • 401K Plans • Individual Retirement Accounts • Common Misconceptions about 401Ks The 401K Plan • A 401(k) plan is a qualified plan with a cash-or-deferred arrangement (CODA) • CODAs are permitted with profit sharing plans, including stock bonus plans and ESOPs. • Prior to the establishment of 401(k) plans, employees did not have the option of deferring compensation into a retirement plan on a pretax basis • Retirement plans were funded almost entirely by employers • Some companies offered “thrift” plans, which allow employee contributions of after-tax dollars, not pretax dollars as with 401(k) plans • A salary reduction agreement is one type of cash or deferred election, and allows a participating employee to contribute future compensation into a 401(k) plan The 401K Plan • You often hear individuals refer to their “401(k) plan,” but in reality 401(k) provisions must be combined with either: • A profit sharing plan (including stock bonus plans and ESOPs), or • A “SIMPLE” plan. • Currently, these are the only two plans that offer 401(k) provisions • In a nutshell, a profit sharing 401(k) plan is characterized by: • The ability of employees to make voluntary contributions of pretax dollars up to a certain amount ($18,500 in 2018, plus $6,000 catch-up if over age 50). • These are, in effect, deferrals of compensation that are not taxed until they are distributed from the plan. The 401K Profit Sharing Plan • Individual accounts for participants, who usually are responsible for making investment decisions regarding the assets in those accounts • Matching contributions from employers (called 401(m) contributions); employers can match employee contributions in whole or in part • These matching contributions are tax deductible for the employer to the extent that they do not exceed certain limits (25% of participating employees’ payroll) • Plan loans and opportunities for hardship withdrawals • A plan may be established as part of a profit sharing plan so that non-401(k) profit sharing contributions may be made to participants’ accounts The 401K Profit Sharing Plan 1. Employer discretionary contributions • This is your “traditional” profit sharing part of the plan, and it is entirely funded by employer contributions • The employer is in effect “sharing profits” with its employees, and allocating a certain amount to each employee • There is often a vesting schedule associated with this section of the plan The 401K Profit Sharing Plan 2. Employee elective deferrals • This is the 401(k) part of the plan, allowed because of the 401(k) provisions • It is in this part of the plan that the employee is able to defer some of her compensation, pretax • Employees are always 100% vested in what they have deferred, since it is part of their compensation and they have elected to have it go into the plan rather than currently receiving it The 401K Profit Sharing Plan 3. Employer matching or non elective contributions • This is also in the 401(k) part of the plan, and comes into play when the employer decides to either match a portion of the employee’s elective deferral or decides to make a non elective contribution on behalf of all employees in the plan, whether they make a deferral or not • The vast majority of employers prefer the matching contribution since it encourages employees to save for their retirement • The matching or nonelective contributions may or may not have a vesting schedule, but they often do not if the employer wants to have a “safe harbor” plan in order to pass nondiscrimination tests. The 401K - Eligible Employers • All organizations, with the exception of state and local governments, can currently establish 401(k) plans • Those include: • Sole proprietors. The sole proprietor, or self-employed person, is treated as his own employee. • Partners. If the self-employed individual is a partner, he is treated as an employee of the partnership. • Special rules apply to a partnership’s profit sharing plan if it includes a CODA. • Corporations. Regular (or C), S, and limited liability corporations (LLCs) are eligible. • Tax-exempt organizations • Indian tribal governments The 401K - Eligible Employers • State and Local Governments, as well as non-profits, may establish 403(b) plans, which are very similar to 401(k) plans • Although state and local governments may not establish new 401(k) plans, they may continue to administer grandfathered 401(k) plans established under prior law The 401K - Eligible Employees • A 401(k) plan must allow plan participation to any employee who • Has completed one year of service and has worked a minimum of 1,000 hours • Is at least 21 years old. • These are the basic ERISA eligibility requirements, referred to as “21 and 1.” • A 401(k) plan may require employees to work for up to one year before they can make elective contributions (usually called “deferrals”), but many plans may allow elective deferrals upon employment or within several months of employment. • Even if the employer allows deferrals prior to one year of service, oftentimes employer matches or non elective contributions will not begin until the employee has completed at least one year of service The 401K - Eligible Employees The 401K - Limits on Contributions • Section 401(k) plans are subject to the same “annual additions” limits that apply to other defined contribution plans • Additions to a participant’s account cannot exceed the lesser of $55,000 or 100% of compensation (maximum for 2018). • Additions Include all contributions, including • Elective contributions (but not catch-up contributions); • Matching contributions (401(m)) • Employer non elective contributions • After-tax employee mandatory and voluntary contributions • Employer contributions to another defined contribution plan the employer may have, including money purchase plans, ESOPs, and profit sharing plans The 401K - Limits on Contributions • Additions Include all contributions, including • Forfeitures allocated to a participant’s account from terminated participants • Amounts allocated to a Section 401(h) individual medical account, which is part of a qualified pension plan maintained by the employer • Employer contributions for a key employee allocated to a separate account under a welfare benefit plan for postretirement medical benefits. • Note that the $55,000 annual limit does not include the age 50 catch-up of $6,000 The 401K - Elective Deferrals • Eligible employees may make an election to defer a portion of their compensation prior to actually earning the money that is going to be deferred. • If the employee makes a deferred election, then elective deferrals will come out of the employee’s pay and will be applied to her 401(k) balance instead of being received as cash. • The Internal Revenue Code limits the level of pretax contributions to a maximum of $18,500 per year in 2018 • Subject to the previous limitations, elective deferrals are excluded from the employee’s gross income for the year in which they are made and are not subject to income taxation until distributed. • However, deferrals still remain subject to FICA (Social Security and Medicare) and FUTA (federal unemployment) taxes • Note that FUTA is paid by the employer, not the employee. The 401K - Elective Deferrals Catch-up contributions • Catch-up contributions are additional elective deferrals (up to $6,000 in 2018) that may be made by individuals who are at least age 50 by the end of the plan or calendar year • Catch-up contributions are unique because they are not subject to certain limitations, including: • The IRC Section 402(g) limitation on elective deferrals (see prior discussion) • The IRC Section 415(c) annual additions limitation of $55,000 (2018) Maximum Elective Deferrals (2018) Year Elective Deferral Limit for Individuals under Age 50 Elective Deferral Limit for Individuals Age 50 and Older (includes catch-up contribution) 2018 $18,500 $24,500 ($18,500 + $6,000) The 401K - Non Deductible Contributions • Some 401(k) plans may allow employees to make additional contributions on an after-tax or nondeductible basis. • Also, 401(k) plans may re-characterize elective deferrals as nondeductible employee contributions to satisfy the 401(k) ADP test. • Plan documents will specify whether this option is available to participants • Nondeductible, or after-tax, employee contributions are subject to a nondiscrimination requirement known as the actual contribution percentage (ACP) test • They must be monitored on an ongoing basis to ensure that highly compensated employees do not contribute such significant nondeductible amounts that the plan falls out of compliance. • This is often the case unless the company has a “safe harbor” 401(k) plan The 401K - Employer Contributions • Employers can deduct 401(k) profit sharing plan contributions of up to 25% of the participating employees’ payroll • “Payroll” includes the elective deferrals and catch-up contributions of those employees • For purposes of calculating the 25% deduction limit, employer contributions are defined as non elective contributions, matching contributions, and discretionary profit sharing contributions only • Employee elective deferrals and catch-up contributions are not considered to be employer contributions for this purpose • This is an advantage for an employer that wants to maximize deductible contributions to a 401(k) plan • Plus, it works in favor of employee-participants who want to maximize their plan contributions The 401K - Employer Contributions Matching contributions • Matching contributions are employer contributions made in proportion to a participant’s elective deferrals or, less typically, a participant’s after-tax voluntary contributions • An employer may elect a formula for making matching contributions to a 401(k) plan on behalf of employees making elective deferrals • Plan documents state the formula by which matching contributions, if any, are determined • For example, the formula may have an employer make a qualified matching contribution that is equal to 50% of a participant’s deferral into the plan of up to 6% of the participant’s pay • Typically, matching contributions are 100% vested at all times • However, some 401(k) plans make these contributions subject to a graded vesting schedule The 401K – Self Employed Plans • While 401(k) provisions are generally tied to profit sharing plans they may also take the form of a solo (or Keogh) 401(k), a 401(k) stock ownership plan (KSOP), or Roth 401(k) Solo 401(k) Plans (Keogh) • A self-employed individual can make deductible employer contributions and elective deferrals to a 401(k) profit sharing Keogh plan • A self-employed individual can maximize his contributions to a defined contribution Keogh plan • Let’s consider the advantages of a solo 401(k) profit sharing Keogh plan for Shawn. Schedule C net profit (business profit) Less income tax deduction allowed (1/2 selfemployment tax) Net earnings from self-employment Multiply by .2 (maximum amount allowable for owner) Owner’s contribution = $100,000.00 (7,064.78) $92,935.23 x .2 $18,587.00 In summary, Shawn can make an $18,587 deductible employer contribution and an $18,500 elective deferral (deductible as an ordinary and necessary business expense) to his solo 401(k) profit sharing plan for 2018, a total of $36,587. A shortcut that will allow you to estimate the Keogh contribution is to multiply the net profit by 18.59% (for a 20% contribution) or 12.12% (for a 15% contribution). Note: The further you go above the wage base, the less accurate this method becomes. If Shawn is age 50 or older, he can make an additional $6,000 (2018 limit) catch-up contribution to a 401(k) Keogh profit sharing plan, for a total contribution of $42,587. Sole proprietors or partners, such as Shawn, will find it easier if they commit to making elective contributions during the plan year. Of course, this will require Individual Retirement Accounts (IRAs) • The individual retirement account (IRA) was first introduced in 1974, and there are now two general types of IRA accounts • Traditional IRAs (typically funded with pretax dollars) • The Roth IRA account (always funded with after-tax dollars). • In addition, there are also two employer-sponsored retirement plans that involve setting up IRA accounts for each of the eligible employees: • The simplified employee pension (SEP-IRA) plan and • The SIMPLE IRA plan • IRA accounts are not considered to be qualified plans, but rather simply “tax advantaged” plans • Since they are “individual” plans they are not subject to ERISA requirements and have their own rules and requirements Qualified and Nonqualified Plans, and IRAs Qualified Plans Nonqualified Plans Pension Plans Profit Sharing Plans (DC) Tax-Advantaged Plans Other Nonqualified Plans Defined benefit (DB) Profit sharing Traditional IRA Section 457 plans Cash balance (DB) Thrift plan Roth IRA Stock bonus SIMPLE IRA ISO Money Purchase (DC) ESOP (LESOP) SEP ESPP Target Benefit (DC) Age weighted (SARSEP) NQSO Cross-tested (comparability) 403(b) (TSA) Deferred compensation plans 401(k) plan SIMPLE 401(k) IRAs • An IRA is a trust or custodial account set up for the exclusive benefit of its owner and/or his named beneficiaries • IRAs were introduced as a means of supplementing retirement income after Congress realized that personal savings, payments from employer-sponsored plans, and Social Security benefits were insufficient to meet the financial needs of many Americans at retirement • Over the years, IRAs have grown in popularity, and Congress has expanded the types of IRAs available and the contribution limits, making it possible for more people to enjoy their benefits • IRAs are not qualified plans and are not covered by the Employee Retirement Income Security Act (ERISA) IRAs • However, they are subject to a number of restrictions designed to preserve the assets for retirement by impeding unencumbered access to an IRA’s assets. • The owner may not, for example, borrow from his IRA, and most withdrawals made before the owner reaches age 59½ are penalized IRAs - Statutory Requirements • To comply with the Internal Revenue Code (IRC), every IRA plan must adhere to the following requirements: • An individual (taxpayer) must have compensation (earned income or alimony) and be under age 70½ to be eligible to establish a non-Roth IRA • However, an individual who has compensation (earned income or alimony) and is under or over age 70½ is eligible to establish a Roth IRA • It must be established for the exclusive benefit of an individual (IRAs cannot be established as joint accounts) and the individual’s beneficiaries • It must be established as a custodial account or a trust set up in the United States • Documents must be set in writing IRAs - Statutory Requirements • Contributions (other than rollovers) must be made in cash • For example, the IRA owner cannot take shares of stock from her safe deposit box, use them to fund the IRA, and then take a deduction for the value of those shares • Contributions for 2018 cannot exceed 100% of an individual’s earned income up to $5,500 a year per individual (or $11,000 for a married couple filing a joint return, both of whom are under age 50) • Individuals who are at least age 50 by the end of the year may also make an additional $1,000 catch-up contribution (discussed below) for 2018 • Note: Rollovers are not considered “contributions” and can exceed $5,500 per year. IRAs - Statutory Requirements • IRA contributions for a given tax year must be made by the income tax filing deadline for that year, which is April 15th. Extensions are not included. • Individuals are immediately and fully vested in their contributions; IRA owners always have full control of their accounts and the assets in them • Funds cannot be invested in life insurance policies or in collectibles— with the exception of certain coins and bullion and shares of a publicly traded, stock-exchange-listed investment trust invested in gold or silver bullion (e.g. GLD). • Prohibited transactions between an IRA and its owner will result in the penalties and income taxation of the entire fair market value of an IRA. • Loans to an IRA owner or a “disqualified person” (certain related parties such as family members) are prohibited transactions. IRAs - Statutory Requirements • The use of an IRA by its owner as security for a loan is a prohibited transaction. • Assets cannot be commingled with other property • Distribution of IRA accumulations must begin by April 1 of the year following the year in which the owner reaches age 70½ • If an excess contribution is made to an IRA, then a 6% penalty tax will apply • If the excess contribution is withdrawn, no penalty will apply if the withdrawal is made by the tax return filing due date (including extensions) and if the withdrawal includes any income earned on the excess contribution. IRAs - Traditional vs Roth IRAs • There are currently two types of IRAs: traditional and Roth IRAs • Traditional IRAs may be tax deductible or nondeductible • In a tax deductible IRA, contributions are deductible from current income and earnings are tax- deferred until they are distributed and taxed as ordinary income • In a nondeductible IRA, contributions are made on an after-tax basis and earnings accrue tax-deferred • Upon distribution, all earnings are fully taxable as ordinary income; however, distributions of after-tax contributions are nontaxable • In contrast, contributions to a Roth IRA are always nondeductible (after tax) and earnings accrue tax-deferred • However, distributions that are considered “qualified” are tax-free. Traditional IRAs - Contributions • In 2018, individuals who are under age 70½ and have earned income can contribute to an IRA • Contributions are limited to the lesser of $5,500 or earned income • In addition, individuals who have attained age 50 before the end of the tax year are eligible to contribute an additional $1,000, bringing the annual total contribution to $6,500 • Earned income, according to the IRC definition, includes the following: • Salaries, fees, bonuses, and commissions an individual receives as a result of services performed (W-2 income) • Schedule C (Self-Employment) net income • K-1 income from a partnership (if the partner is a material participant) • Taxable alimony Traditional IRAs - Contributions • Earned income does not include the following: • Unemployment compensation • Passive income, such as interest, dividends, and pension distributions • Capital gains • Deferred compensation (until it is taxed) • Amounts received as a pension or annuity • Social Security income • Workers’ compensation • Income from the sale of property; or • Rental property income, unless this income is derived from a personal service business Traditional IRAs - Contributions Traditional IRAs - Contributions Traditional IRAs - Deductibility • The ability to deduct contributions made to a traditional IRA depends on two factors: • The individual’s status as an “active participant” in a qualified or other retirement plan, and • The individual’s adjusted gross income (AGI) • An active participant is an employee who during the plan year either received a contribution or accrued a benefit under one of the following plan types: • Qualified plans, • Certain government plans (NOT including Section 457 plans) • Tax-sheltered annuity plans (TSAs) (also known as Section 403(b) plans) • A simplified employee pension (SEP), or • A savings incentive match plan for employees (SIMPLE) IRA Traditional IRAs - Deductibility Filing Status Active Participant? Below $63,000 $63,000–$73,000 Above $73,000 Yes Full deduction Partial deduction No deduction No Full deduction Full deduction Full deduction Below $101,000 $101,000– $121,000 Above $121,000 Yes—both active Full deduction Partial deduction No deduction No—both not active Full deduction Full deduction Full deduction Single Married (Filing Jointly) Spousal IRA (Filing Jointly) Income (AGI) Relative to Phaseout Ranges One spouse yes, the other no: Active spouse Below $101,000 full deduction $101,000– $121,000 partial deduction Above $121,000 no deduction Nonactive spouse Below $189,000 full deduction $189,000– $199,000 partial deduction Above $199,000 no deduction Traditional IRAs – Taxation of Distributions • Taxable distributions from IRAs are always treated as ordinary income. (There is no preferential treatment with respect to gains.) • The extent to which a distribution is subject to tax depends on whether the IRA was funded with pretax (deductible) or after-tax (nondeductible) contributions • At distribution, a fully deductible IRA has a cost basis of $0 because contributions were made with pretax money, and investment earnings have accrued tax-deferred. • Therefore, the full amount of any distribution will be taxable as ordinary income Traditional IRAs – Taxation of Distributions • Contributions to a nondeductible IRA, as the name implies, cannot be deducted from taxable income; in other words, contributions are made on an after-tax basis • Therefore, nondeductible IRAs have a cost basis • When the account owner begins taking distributions, ordinary income tax is owed only on the account earnings • The cost basis is not subject to taxation upon distribution Traditional IRAs - Required Minimum Distribution • Generally, it is advantageous to prolong the period of tax-deferred investment earnings for as long as possible • However, the period of tax deferral is limited by the minimum distribution requirements of IRC Section 401(a)(9) • An IRA owner may begin penalty-free withdrawals from IRAs upon reaching age 59½, but there is no requirement that withdrawals must be made until the required beginning date (RBD) • Withdrawals must begin by April 1 of the year following the year in which the owner turns age 70½—this date is the required beginning date Traditional IRAs - Required Minimum Distribution • Of particular note, this required beginning date applies to IRA accumulations whether or not the IRA owner has retired • As with qualified plans and 403(b) plans, distribution shortfalls are subject to a 50% penalty tax. • For example, if the required minimum distribution is $2,000 and no distribution is taken, then the penalty tax would be $1,000 Roth IRAs • Roth IRAs were created by the Taxpayer Relief Act of 1997 • In contrast to traditional IRAs, no deduction is available for contributions to Roth IRAs—all contributions are made with after-tax dollars • However, Roth IRAs offer a unique opportunity for tax-free distributions for both the owner and the beneficiary • Eligibility for making a Roth IRA contribution is subject only to the earned income requirement and the annual income limitations • Neither active status nor age is relevant for determining Roth eligibility • Unlike traditional IRAs, Roth IRAs do not require an individual to determine the “deductibility” of a contribution—remember, all contributions are after tax Roth IRAs • For Roth IRAs you are determining “eligibility,” and this is based solely on income. • In 2018, individuals filing as single taxpayers with modified adjusted gross income up to $135,000 and married joint filers with modified adjusted gross income up to $199,000 are eligible to contribute to a Roth IRA • Unlike traditional IRAs, individuals can continue to contribute to a Roth IRA after age 70½, as long as they have earned income. • In addition, Roth IRA owners are not subject to mandatory required minimum distribution rules. • Beneficiary recipients of Roth IRAs are subject to required minimum distribution rules. Roth IRAs • Roth IRA Modified AGI Phaseouts (2018) • Modified AGI is AGI less any allowable adjustments, such as • Retirement-plan contributions • Student loan interest and • Health insurance premiums paid by self-employed individuals From To Single $120,000 $135,000 Married filing jointly $189,000 $199,000 Married filing separately $0 $10,000 Roth IRAs - Distributions • If distributions from a Roth are deemed “qualified,” they are tax-free • Distributions that do not meet the definition of a “qualified” distribution may be subject to income tax and the 10% early withdrawal penalty • To be considered a “qualified distribution,” two requirements must be met: • The owner must meet the five-year holding period requirement, and • The distribution must satisfy one of the following four requirements • • • • Must be made on or after the date the owner attains age 59½ Must be made to a beneficiary or after the death of the owner Must be made to the owner because of the owner’s disability, or Made for first time home buyers expenses of $10,000 Roth IRAs - Distributions • A distribution meets the “five-year” holding period requirement if it is made after five years have passed since the first contribution was made to a Roth IRA • This same holding period requirement will apply to future contributions made to any Roth IRA. • In other words, the five-year holding period begins in the year of the first Roth IRA contribution and this same holding period will apply to all future contributions, whether made to the same or different Roth IRAs Roth IRAs - Conversions • Unique to the Roth IRA is the ability to accept tax-deferred asset funds from a traditional IRA or employer-sponsored retirement plan, such as a 401(k), 403(b), or governmental 457(b) • Such a conversion can be done without regard to income eligibility limits • When converting pretax dollars to a Roth IRA, the converted amount is taxable as ordinary income in the year of conversion, but future growth will be tax-free • Pretax dollars are subject to ordinary income tax at the time of conversion but are not subject to the 10% early withdrawal penalty, even if under age 59½. • If, however, a withdrawal of converted funds is made from the Roth IRA prior to five years having elapsed since the conversion, such a withdrawal would be subject to the 10% penalty Roth IRAs - Conversions • One of the biggest benefits of a Roth IRA conversion is that there is a window to undo, or “recharacterize,” the conversion • A recharacterization may make sense if: • The investments have fallen in value since the time of the conversion • There isn’t the cash necessary to pay taxes on the converted amount, or • Expectations about the future tax rate have changed • The time limit for recharacterizing is the due date, including extensions, of the tax return for the year in which the conversion was done • Over more than 30 years as a 401(k) plan consultant, I have worked with some of the most prestigious companies in the world including Apple, AT&T, IBM, John Deere, Northern Trust and Northwestern Mutual • And, I am always surprised by the simple -- but significant -misconceptions many people have about their 401(k) plans. Significant Misconceptions 1. I only need to contribute up to the maximum company match • Many plan participants believe their employer is sending them a message on how much to contribute • As a result, they only contribute up to the maximum matched contribution percentage • In most plans that works out to be only 6% in employee contributions • However, many studies indicate that participants need to add at least 15% each year to their 401(k) accounts Significant Misconceptions 2. It is OK to take a participant loan • I have had many participants tell me, "If this were a bad thing why would the company let me do it?" • Account leakage via defaulted loans is one of the reasons some of us are not able to save enough for retirement • Many people, when they change jobs, elect to default on outstanding 401(k) plan loans because they don't have the cash lying around to pay the loans back • In addition, taking a 401(k) loan is a horrible investment strategy. Generally, if you can take a loan from somewhere else, you should do it Significant Misconceptions 3. Rolling a 401(k) account into an IRA is a good idea • There are many investment advisors working hard to convince everyone this is a good thing to do. • However, higher fees, lack of free investment advice, use of highercost investment options, lack of availability of stable value and guaranteed fund investment options, and many other factors make this a bad idea for most of us • The Department of Labor agrees, as shown in its recent auto portability proposal • If you can, roll your prior 401(k) account balances, and your IRA accounts, into your existing employer's 401(k) plan • It is a much more cost-effective option Significant Misconceptions 4. My 401(k) account is a good way to save for college, a first home, etc. • When 401(k) plans were first rolled out to employees decades ago, human resources staff helped persuade skeptical employees to contribute by saying the plans could be used for saving for many different things • They shouldn't be • It is a bad idea to use a 401(k) plan to save for an initial down payment on a home or to finance a home purchase • Similarly, a 401(k) plan is not the best place to save for a child's education - 529 plans work much better • In addition, your 401(k) plan is not the best place to save for a new car, boat or that deluxe vacation • If you wish to enjoy any sort of quality of life in retirement, use your 401(k) retirement plan to save only for retirement. Significant Misconceptions 5. I should stop making 401(k) contributions when the stock market goes down • I have had many participants say to me: • "Bob, why should I invest my money in the stock market when it is going down. I'm just going to lose money!” • When the market is falling or has decreased significantly in value, stocks are on sale. It is the best time to be investing in the market! • Stick with your contribution plan in all types of markets. Stopping and starting contributions is not a good way to accumulate the balance you are going to need to retire. • The biggest challenge participants who stop contributing face is when to resume their contributions • Most wait until the stock market recovers • As a result, they end up buying when the cost of stocks is high -- not a good investment strategy. Significant Misconceptions 6. Actively trading my 401(k) account will help me maximize my account balance • Studies have consistently demonstrated that trying to time the market (this includes following newsletters or a trader's advice) is rarely a winning strategy • Consistently adhering to an asset allocation strategy that is appropriate to your age and ability to bear risk is the best approach. • No one can predict what the market will do in the future • Please don't believe that you or anyone else can • Don't try to "trade" your account • Everyone I have known who did this traded their account down to nothing Significant Misconceptions 7. Indexing is always superior to active management • Although index investing ensures a low-cost portfolio, it doesn't guarantee superior performance or proper diversification • Access to commodity, real estate and international funds is often sacrificed by many pure indexing strategies • A blend of active and passive investments often proves to be the best investment strategy for most of us. Significant Misconceptions 8. Target date funds are not good investments • Most experts who say that target date funds are not good investments are not comparing them to most participants' allocations prior to investing in target date funds • Many of us, before investing in target date funds, may have invested in only one fund or a few funds that were inappropriate risk-wise for our age • Studies show that the average number of funds used by 401(k) participants is between three and four • That generally is not enough to ensure proper diversification • Target date funds offer proper age-based diversification Significant Misconceptions 9. Money market funds are good investments • These funds have been guaranteed money losers for a number of years because they have not kept pace with inflation. • Unless you are five years or less away from retirement or have difficulty taking on even a small amount of risk, these funds are below-average investments • Try to invest in stable value or guaranteed fund investment options instead. Significant Misconceptions 10. I can contribute less because I will make my investments work harder • Many participants have said to me, "Bob, I don't have to contribute as much as others because I am going to make my investments do more of the work.” • Most participants feel that the majority of their final account balance will come from earnings in their 401(k) account • However, studies show that the major determinant of how much participants end up with at retirement is how much they contribute rather than how much they earn. Significant Misconceptions 11. A million-dollar 401(k) plan balance is enough to retire on • It should be enough, but for many of us, it won't be • A lot of us hope to do things in retirement that we only dream about during our working years • Others will experience unexpected health care costs that can quickly deplete their savings • Quite a few of us will live much longer than we ever thought • As a result, many experts feel that a million-dollar 401(k) plan balance won't be enough • I hope these suggestions help you become a better 401(k) plan investor Case Study - Savings • You are a newly hired analyst at a top company • Your starting salary is $80,000 year • You are attempting to save about 10% of your income • You have the following options for savings and investment. 1. A Company 401K Plan that matches the first 6% Pretax Contributions at a 50% Match rate 2. Your own Individual Retirement Account (IRA) with a balance of $5,500. 3. Your own Roth IRA with a balance of $1,250. 4. Your brokerage account with a balance of $2,500 Based on information in the course, how much would you save each year and in which savings options would you put the money?
Purchase answer to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

find the attached completed assignment

Case Study - Savings


You are a newly hired analyst at a top company



Your starting salary is $80,000 year



You are attempting to save about 10% of your income



You have the following options for savings and investment.

1. A Company 401K Plan that matches the first 6% Pretax Contributions at a 50%
Match rate
2. Your own Individual Retirement Account (IRA) with a balance of $5,500.
3. Your own Roth IR...


Anonymous
I was struggling with this subject, and this helped me a ton!

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4

Similar Content

Related Tags