CFP

AAA

Types of Retirement Plans - Factors affecting contributions or benefits

Employer contributions to a qualified plan are deductible up to certain limits. The contributions, along with any earnings and gains, are generally tax free until distributed.

  1. Deduction limits - The deduction limit depends on the type of qualified plan.
    • Defined contribution plans - Deduction cannot be more than 25% of the employee's compensation.
      • Self-employed - Must reduce this figure to take into account the deduction for one-half of the self-employment tax and the deduction for contributions on the self-employed individual's behalf to the plan. The self-employed individual uses a net earnings figure to calculate the appropriate deduction limit.
    • Defined benefit plans - Deduction is based on actuarial assumptions and computations. An actuary must calculate the deduction limit.
  2. Defined contribution limits - Annual contributions and other additions (excluding earnings) cannot exceed the lesser of the following amounts:
    • 100% of the participant's compensation.
    • $52,000 (for 2014).
    • Excess annual additions - Amounts contributed to a defined contribution plan that exceed contribution limits. A plan can correct excess annual additions caused by the following actions:
      • Reasonable error in estimating participant's compensation.
      • Reasonable error in determining the permitted elective deferrals.
      • Forfeitures allocated to participant's accounts.
    • Correcting excess annual additions - A plan can correct excess annual additions in the following ways:
      • Allocate the excess to other plan participants to the extent of their unused limits.
      • If these limits are exceeded, do one of the following:
        1. Hold the excess in a separate account and allocate to participants in the following year before making any contributions for that year.
        2. Return employee after-tax contributions or elective deferrals.
  3. Defined benefit limits - The maximum contribution is the amount needed to provide an annual benefit no larger than the smaller of $210,000 (for 2014) or 100% of the participant's average compensation for his or her highest three consecutive calendar years.
  4. Annual compensation limit - The maximum compensation that may be considered for qualified plan purposes is $260,000 (2014, indexed for inflation).
  5. Definition of compensation - The IRS defines compensation to include all of the following:
    • Defined contribution plans - Deduction cannot be more than 25% of the employee's compensation.
      • Self-employed - Must reduce this figure to take into account the deduction for one-half of the self-employment tax and the deduction for contributions on the self-employed individual's behalf to the plan. The self-employed individual uses a net earnings figure to calculate the appropriate deduction limit.
Top heavy plans
comments powered by Disqus
Related Articles
  1. Six Things Bad Financial Advisors Do
    Investing Basics

    Six Things Bad Financial Advisors Do

  2. Fee-Only Financial Advisers: What You ...
    Investing Basics

    Fee-Only Financial Advisers: What You ...

  3. It Is Not Too Late To Hedge Against ...
    Stock Analysis

    It Is Not Too Late To Hedge Against ...

  4. Another Sound Lesson In Risk Management
    Investing News

    Another Sound Lesson In Risk Management

  5. 10 Characteristics of Successful Entrepreneurs
    Entrepreneurship

    10 Characteristics of Successful Entrepreneurs

Trading Center