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401k Plan

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Accounting
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Contributing money to 401k plan is done tax free. Limits are imposed on how much
money to be contributed per year. The reason behind this is keeping people from money. The
employer always set a specific amount to be contributed by an individual per year. They also set
their own addition to the individual’s contribution. For example if an individual’s maximum
contribution per year is $20,000 and the employer pays 50% to the matching contribution, then
the employer would be contributing an additional $10,000. This is a form of motivation to the
employees and also an attraction to individual who would like to work with the company.
The company maximum contribution is 6% for its employee compensation to their salary.
Let’s take an example of an employee who earns $200,000 per year. This employee contribution
will be $12,000 as per the calculation. If the company sets individuals maximum contribution per
year to be $,18000 per year, then with the 50% match contribution set by the company the
employee were to contribute this full amount per year, then the employers matching contribution
would amount to $9000, however for the $200,000 yearly earners, theirs would exceed the 6%
limit that has been set. The employer maximum contribution is set $12,000 and thus cannot
Exide it. With the calculation it makes the years contribution to be $21,000.
Highly Compensated Employees are a subject to further limitations set for all individuals
mentioned above. For one to be considered a highly compensated employee, they must be
making over $120,000 per year. They should also be included in the company’s top 20% earners.
So if an individual is the highest paid person working for a company and makes less than
$120,000 annually, they do not apply to the specified limits. For individuals who fall into this
category of the highly compensated employees, means they do make over $120,000 and
categorized amongst the top 20% earners in the company, and thus the total contribution that the
employer can make will be limited. This limit is usually based on employers 401k overall

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participation rate. Contribution to HCE’s pool is not allowed to be more than 125% of the overall
average to the non-HCE’s contributions. The amount of contribution by the company depends on
how many of the non- highly compensated employees participate in the current 401K plan.
Funds are returned to the employee if the highly compensated employee’s payments are in
excess of 125%. The employee is then allowed to use the funds in re-contributing their 401k in
form of a post task employee contribution. All post tax contributed should be reported as a
taxable income for its tax filing purposes (Even, 2005).
The government regulate amount of money that can be contributed to the plan. 401k
Withdrawal limits are never there once an individual reaches the magical age of 59 ½. One is
able to take as much amount of money they like. But it come with it consequences the individual
will deal with that may occur. Withdrawals taken before the age of 59 ½ is usually treated as a
non-qualified withdrawal. It comes with a 10% penalty to the federal government. It is also
added to the normal taxes. It is important for an individual to create a plan that allows them to
structure withdrawals. This is important because they will take required minimum amount for
any need at the rightful age (Munnell, 2004).
As a tax analyst I know that the 401k plans are employer-sponsored most popularly
defined contributor plans available today. All contribution made to the plan by the employee
entitles them to a tax deduction. Also contributions taken directly from their paycheck are
usually free from their income taxes. Withdrawal from account results to Tax deduction. The
plan requires the participant withdraw by the age of 70 ½. Required minimum distribution is the
name of this withdrawal amount. Accounts are subjected to IRS penalties if the owners fail to get
their required minimum distribution. The requirement guarantees the government that they will
receive taxes on owner’s money at some point. 401k tax features is usually opposite of the

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Contributing money to 401k plan is done tax free. Limits are imposed on how much money to be contributed per year. The reason behind this is keeping people from money. The employer always set a specific amount to be contributed by an individual per year. They also set their own addition to the individual’s contribution. For example if an individual’s maximum contribution per year is $20,000 and the employer pays 50% to the matching contribution, then the employer would be contributing an additional $10,000. This is a form of motivation to the employees and also an attraction to individual who would like to work with the company. The company maximum contribution is 6% for its employee compensation to their salary. Let’s take an example of an employee who earns $200,000 per year. This employee contribution will be $12,000 as per the calculation. If the company sets individuals maximum contribution per year to be $,18000 per year, then with the 50% match contribution set by the company the employee were to contribute this full amount per year, then the employers matching contribution would amount to $9000, however for the $200,000 yearly earners, theirs would exceed the 6% limit ...
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