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re: Can someone explain the highly compensated employee 401k rule
Posted on 6/30/15 at 7:24 am to LigerFan
Posted on 6/30/15 at 7:24 am to LigerFan
They aren't stopping you from saving moeny just pre-tax money (it can go into an after tax brokerage account). Also, you can look into a traditional IRA but may be subject to limitations depending on your income and the fact that you are covered by your employers plan.
The ADP/ACP test is complicated but fair and well intended.
The ADP/ACP test is complicated but fair and well intended.
2
Posted on 6/30/15 at 7:38 am to Jabstep
quote:The rules are complicated and well intended, but they are not fair. When is it fair to have someone's taxable income determined by the decisions of other people acting in what they perceive to be their own self-interest? Would you like your taxable income to be dependent on a decision I make, or the other posters' on this board make collectively?
The ADP/ACP test is complicated but fair and well intended.
Posted on 6/30/15 at 7:42 am to Jabstep
The tax advantages of saving in a 401k aren't really seen by the lower income segments of the population.
For example, consider the two following people who make IDENTICAL contributions and will make IDENTICAL withdrawals from a 401k
1) Married single income earns $65k/year
2) Single earns $210k/year
If both 1) & 2) make identical $15k contributions every year to a 401k here is the tax savings
TAX SAVINGS on $15k contribution
1) ~15% Fed + ~5% State = approx $3000
2) ~33% Fed + ~5% State = approx $5700
So despite both people making the same great decision to save for retirement, and both people saving the exact same amount, one person gets an absurd amount of benefit more than the other. Considering everything else is equal, there is never a point where these savings become equal as withdrawals are taxed identically. One of the few instances where "I'm not rich enough to get a tax break" is actually legit
The HCE test is designed to encourage employers to make their plans attractive to lower income employees. Typically they have to do that by adding money from the employers end rather than asking the employee to take away from their wages with things like safe harbour contributions, good matching programs + auto enrollment.
For example, consider the two following people who make IDENTICAL contributions and will make IDENTICAL withdrawals from a 401k
1) Married single income earns $65k/year
2) Single earns $210k/year
If both 1) & 2) make identical $15k contributions every year to a 401k here is the tax savings
TAX SAVINGS on $15k contribution
1) ~15% Fed + ~5% State = approx $3000
2) ~33% Fed + ~5% State = approx $5700
So despite both people making the same great decision to save for retirement, and both people saving the exact same amount, one person gets an absurd amount of benefit more than the other. Considering everything else is equal, there is never a point where these savings become equal as withdrawals are taxed identically. One of the few instances where "I'm not rich enough to get a tax break" is actually legit
The HCE test is designed to encourage employers to make their plans attractive to lower income employees. Typically they have to do that by adding money from the employers end rather than asking the employee to take away from their wages with things like safe harbour contributions, good matching programs + auto enrollment.
This post was edited on 7/1/15 at 6:50 am
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