Matthew (48 at year-end) develops cutting-edge technology for SV Inc., located i
ID: 2570244 • 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 $240,000.
b-1. What amount will SV contribute to Matthew’s money purchase plan?
b-2. What amount can Matthew contribute to his 401(k) account in 2016?
Explanation / Answer
B-1 The sum of the employee & employer contribution towards Money purchase pension plan can be lesser of -
i. 100% of employee contribution
ii. 49000
100% of his contribution will be 100% of 240,000 = $2,40,000. So, the limit will be 49,000
Under this plan SV will contribute (2,40,000*15%) = 36,000 to Mathew's account.
b.2 Mathew can contribute to 401 (k) , the balance over and above SV contribution to the tax limit.
49000- 36000 = $ 13,000