Understanding Qualified Retirement Plans

Duggan, Sean cropped

by Sean Duggan, Professional Consultant

Last week we talked about non-qualified retirement plans, but this week we would like to discuss the other alternative—qualified retirement plans.

It is likely that most of you have access to a company-sponsored retirement plan.  It is also likely that many of you take full advantage of the opportunity to save in the plan. This article is designed to provide you information relating to various qualified retirement plan options that may be available to you.

401(k) Plans

The most common type of plan that people participate in is called a 401(k) plan.

A 401(k) plan is an employer-sponsored retirement plan that allows employees who participate to defer a portion of their salary into the plan and, in many cases, receive a matching contribution from the employer.  The most basic retirement plan savings strategy is to take advantage of the employer’s full matching contribution.  For example, if the company makes a matching contribution of 50% of the first 6% an employee defers, then you should defer at least 6%.

One can almost hear the GEICO commercial in the background, “Everybody knows that!” But, did you know that under certain circumstances it can make sense to defer above the 6% mark? The IRS deferral limit for 2015 is $18,000, and for those 50 or older an additional $6,000 can be deferred. Deferring as much as your financial situation will allow, enables you to save money without ever really “missing” it, since those funds never appear in your paycheck.

That being said, for highly compensated employees (earning over $120,000 in 2014 or a 5% owner of a business) deferrals may be limited due to the Average Deferral Percentage test.  If your deferrals are limited you may want to talk to your advisor as they may be able to help your company with testing strategies to eliminate or mitigate refunds.

Roth Deferral / Roth Conversion

Other strategies to consider, when available, are the Roth deferral feature in your plan or Roth Conversion opportunities.

Roth deferrals are taxable today, but they grow tax free if taken from the plan as a qualified distribution.  In addition, they give you tax diversification by having both taxable and non-taxable money to withdraw from the plan.  There are no compensation limits for making Roth deferrals as there are for Roth IRA contributions.

Roth conversions are permissible  within certain plans.  By converting the pre-tax balances to Roth balances, you can pay current taxes today on the conversion amount, but your account then grows tax free as long as you take qualified distributions later.

Many of you are likely familiar with Roth IRA Conversions.  This is similar, but the conversion happens within your 401(k) plan.

As we move through 2015, you may want to consider whether implementing any or all of the above  strategies makes sense for your retirement accounts.  If you are interested in hearing more about what financial alternatives may be available to you through your employer, you should talk to your Human Resources representative.  You should also consult with your Moneta, or other trusted advisor, to discuss whether any of the above strategies make sense in your 401(k) account.

 


 

© 2015, MONETA GROUP INVESTMENT ADVISORS, LLC. ALL RIGHTS RESERVED. THESE MATERIALS WERE DEVELOPED FOR INFORMATIONAL PURPOSES ONLY AND DO NOT TAKE INTO ACCOUNT YOUR INDIVIDUAL NEEDS, FINANCIAL OR OTHERWISE, AND SHOULD NOT BE RELIED UPON BY YOU WHEN MAKING ANY PARTICULAR FINANCIAL RELATED DECISIONS. THE INFORMATION HEREIN WAS DERIVED FROM SOURCES DEEMED TO BE RELIABLE BUT HAVE NOT BEEN INDEPENDENTLY VERIFIED, AND NO REPRESENTATIONS OR WARRANTIES ARE MADE WITH RESPECT THERETO.