Started By
Message

re: Can someone explain the highly compensated employee 401k rule

Posted on 6/30/15 at 7:42 am to
Posted by GenesChin
The Promise Land
Member since Feb 2012
37709 posts
Posted on 6/30/15 at 7:42 am to
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.




This post was edited on 7/1/15 at 6:50 am
Posted by jturn17
Member since Jan 2011
4978 posts
Posted on 6/30/15 at 8:02 am to
quote:

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.

I agree with everything you're saying, but it doesn't always help or work. My Fiance's company matches 100% up to 6% total salary, and she's still limited. I'm not sure they do auto enrollment though.

I'm okay with the system, but it's not perfect. There are circumstances where there's nothing you can do to make low-middle income people save in their 401k.
Posted by Croacka
Denham Springs
Member since Dec 2008
61441 posts
Posted on 6/30/15 at 12:58 pm to
quote:

TAX SAVINGS on $15k contribution

1) ~15% Fed + ~5% State = approx $3000
2) ~33% Fed + ~5% State = approx $9300



Is there a math error here?

Doesn't the #2 earner only save 38% of 15k?
first pageprev pagePage 1 of 1Next pagelast page
refresh

Back to top
logoFollow TigerDroppings for LSU Football News
Follow us on Twitter, Facebook and Instagram to get the latest updates on LSU Football and Recruiting.

FacebookTwitterInstagram