Matthew (48 at year-end) develops cutting-edge technology for SV Inc., located i
ID: 2570217 • Letter: M
Question
Matthew (48 at year-end) develops cutting-edge technology for SV Inc., located in Silicon Valley. In 2016, Matthew participates in SV’s money purchase pension plan (a defined contribution plan) and in his company’s 401(k) plan. Under the money purchase pension plan, SV contributes 15 percent of an employee’s salary to a retirement account for the employee up to the amount limited by the tax code. Because it provides the money purchase pension plan, SV does not contribute to the employee’s 401(k) plan. Matthew would like to maximize his contribution to his 401(k) account after SV’s contribution to the money purchase plan.
Assume Matthew’s annual salary is $60,000.
c-1. What amount will SV contribute to Matthew’s money purchase plan?
c-2. What amount can Matthew contribute to his 401(k) account in 2016?
Explanation / Answer
In 2016 the maximum limits for money purchase pension plan is wither $53,000 or 25% of all participants' compensation, whichever is less.
C-1) 25% limit is lesser than $53,000, hence an contribution of 25% of Mathew compensation i.e up to $15,000 is allowable.
Mathew will contribute 15% of his compensation i.e $9,000 and remaining 10% i.e $6,000 SV will contribute to money purchase pension plan.
c-2) Salary reduction contribution up to $12,500 for ages less than 50 and $15,500 if age 50 or over is allowable for 401(k) contribution, Since SV does not contribute to Mathew's 401(K) he can opt for salary reduction of 10% every month + non elective contribution of 2%.
Salary reduction contributions
(60000*0.10)
6000
2% non elective contributions
(60000*0.02)
1200
Total Contributions
7200
Salary reduction contributions
(60000*0.10)
6000
2% non elective contributions
(60000*0.02)
1200
Total Contributions
7200