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Learned something new - no 401k if you are

December 26th, 2006 at 05:23 pm

Bummer.

Had a philosophical discussion with my dad over dinner last night as for whatever reason the topic of 401ks came up and he said in the past he was unable to contribute the max because of "top heavy" rules.

I wouldn't say I am exactly completely clueless when it comes to 401k and retirement plans. I have audited them (LONG AGO) and deal with them a lot in planning for our clients. I remember auditing the top heavy rules and such, but with our clients today, most of them are doctors with lowly-compensated office staff. If they take a safe harbor plan they can put in as much as they want for themselves and give all their employees 3% of their salary (which doesn't really amount to much with so many small beans employees). So as we discussed it I did think aloud that maybe safe harbor plans were good for our clients but not in different situations. But at the same time I told my dad, that is just crazy. I am sure the laws have changed. I have no idea why you as an employee should not be allowed to contribute 20k if you like (since he is over 50). Top-heavy rules were meant for the owners and their family, nothing to do with employees who were compensated well.

So I wrapped up all my work early (a productive day!!!!) and decided to look up real quick. Lo and behold found the following article which is very recent.

http://money.cnn.com/2006/11/10/pf/expert/expert.moneymag.mo...

I guess my dad was right and I have to go tell him so - hehe. He gets paid quite well, so it is possible he will come up against this at his newer employer.

As for us, it kind of bums me out as I have been encouraging dh that when he should go back to work to find a job with a 401k. HE can contribute 15k/year then, which will be fine when he is working again - his whole check will probably go to savings and retirement for the most part. I am not too worried since odds are he will get a $30k/year job or something and he won't have to worry about top-heavy rules. But for me if I switch jobs, may be something I would come up against. & hey it would be great if both of us brought in big bucks down the road, but this is something we could run up against. I don't know. IT was just a "tax shelter" I looked forward to.

Just something else to watch out for to ensure we could use it. It just seems silly, of course employees who make more will want to contribute more. Golly gee.

So I learned something and figured I would share.

2 Responses to “Learned something new - no 401k if you are”

  1. mariannej Says:

    Boy that does seem like a really stupid law!

    My big peeve is that when you are employed at a small business which does not provide a 401(k) - (probably already making alot less $$ than those who are employed at companies with 401k plans) - and you would like to put money away for retirement then you are screwed because the only thing you can use for retirement is an IRA which allows you to put in $4000/yr maximum. Nobody is going to be able to live on that in retirement!
    Frown

    Yet those who work for larger companies and make more money NOW will also have more money LATER because they are allowed to sock away 4 times that amount toward retirement in their 401(k) PLUS open the IRA accounts that us measly folk do. Bah! It really makes me mad.

  2. monkeymama Says:

    Now I have to read your rant...

    I hear you - it is very unfair that simply because you work for a company that offers 401k you can put in 15k (plus IRA sometimes).

    But it is not a big company/small company thing if you ask me. Plus I Worked at a big company and they did not compensate me nearly as well as the very small firm I Work at now. My boss does not have a 401k but I think the top-heavy rules may have a lot to do with it.

    What is even more unfair is business owners can sock away SO MUCH money, up to $49k in some cases. But this is the government's way of rewarding small business owners. Most of our clients (with just a few employees) offer 401k and profit sharing, under safe harbor rules, so that they can sock away $49k every year, if they simply throw 3% of employees' wages at their employees as a match. A small employer who is not doing this is hurting themselves more than just hurting their employees.

    But the rules are complicated and their may be other reasons. & IT is expensive for a small company to administer a plan if only 1 or 2 people will participate.

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