401ks & Qualified Plans

1. 401ks & Qualified Plans

2. PLEASE DO NOW… • On Socrative, please answer the following question: • Name all of the possible sources of your retirement income you will receive in the future.

3. TODAY’S GOALS • What is a Qualified Plan? • Why should we establish a 401k plan? • How do we contribute to a 401k plan? • What is an ESOP? • What is Matching & Vesting?

4. INVESTMENT MANAGEMENT STANDARD(S) Achievement Standard: Evaluate savings and investment options to meet short and long-term goals. Achievement Standard: Evaluate services provided by financial deposit institutions to transfer funds.

5. DEFINITIONS TO KNOW • Vesting • Matching • 401k Plan • Defined Benefit Plan • Defined Contribution Plan • Distributions

6. WHAT IS A QUALIFIED PLAN? • A retirement account established by the employer for the benefit of the employee. • Allows the employer a tax deduction for contributing to the plan. • Employees make contributions on a pre-tax basis and earnings are invested and grow tax-deferred. • Employees cannot take distributions (withdrawals) until he or she reaches age 59 ½. • Employees are required to take distributions at age 70 ½ (Required Minimum Distributions or RMDs). • There are 2 types of qualified plans: • Defined Benefit - Employer makes contributions, benefits guaranteed (e.g., PENSION PLAN). • Defined Contribution - Employee makes contributions, employer can make contributions, no guarantees (e.g., 401k Plan).

7. 401k PLAN EXAMPLE Here is an example of contributing on a pre-tax basis: Assume you earn $40,000 per year and pay 25% in income taxes. If you contribute $6,000 of that to your 401k, you won’t have to pay tax on the $6,000.

8. WHY SHOULD WE ESTABLISH A 401k PLAN? • To provide retirement income for ourselves and our families. • To defer paying taxes. • 401ks allow you to take a loan from your account (NOT A SMART MOVE)

9. HOW DO WE CONTRIBUTE TO A 401k PLAN? Your contributions simply come out of your paycheck, on a pre-tax basis. Example:Patty earns $80,000 a year working for Microsoft as a computer programmer. She contributes 13% of her salary to her 401k plan. How much, in dollars, does she contribute each MONTH to her 401k plan? Monthly Contributions to 401k= (Salary * % Contribution)/12 Monthly Contributions to 401k= ($80,000 * 13%)/12 Monthly Contributions to 401k= $866.67 per month

10. WHAT IS AN ESOP? • Employee Stock Ownership Plan • A defined contribution plan by which the investments are primarily in the employer’s stock.

11. WHAT IS MATCHING & VESTING? Matching is a type of contribution an employer chooses to make to an employee’s 401k plan. • The employee’s maximum contribution in 2013 = $17,500 • On average, employers MATCH between 0-6% of the employee’s salary. • The combined contribution amount cannot exceed $51,000.

12. WHAT IS MATCHING & VESTING? For Example: $3,000 in FREE Money that you can invest!!

13. WHAT IS MATCHING & VESTING? (Cont’d) VESTING is the process by which the employee earns a non-forfeitable right to benefits funded by employer contributions. • Employees are always 100% vested in their own contributions. • Employees are usually 100% vested in employer contributions after 3+ years.

14. LET’S PRACTICE… Mike is 40% vested in his 401k plan. The employer’s contribution represents $10,500 of the total value of the plan. His contributions represent $50,000 of the total value of the plan. What is the total VESTED value of his 401k? • Solution: • Vested Value of 401(k) = (% vested * employer contribution) + Total value of employee contributions Vested Value of 401(k) = (40% * $10,500) + $50,000 Vested Value of 401(k) = $54,200

15. A LOOK AHEAD…… • SEP Plans • Case Study #4

16. QUESTIONS???