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31 Dec / 401 k Contributions

Schultz & Associates, CPA, Plymouth, Michigan

A 401 k plan is an employer sponsored plan. Certain requirement must be met before a employee become eligible. for 2013 and 2013 an employee may choose to defer a maximum of $,17,500 on a pre-tax basis. employee’s who are over the age of 50 years by the end of the plan year may make a catch-up contribution of up to $5,500 for 2013 and 2014.

If all of the requirements are met by the employer sponsored plan then the contribution is not subject to current tax.  Rather it is deferred to taxation until it is distributed. A contribution to 401 k plan is however subject to medicare and social security taxes (FICA). Any excess contributions generally need to be included in the employee’s gross income and return to them prior to April 15.

Withdrawal from a 401 k plan are subject to a 10% if withdrawn prior to age 59 1/2. However, there are some provisions that allow for the waiver of the penalty.

A 401 k plan is considered a defined contribution plan. It is eligible for employer contributions at the election of the employer. A 401 k plan fall under the guidance of the Employee Retirement Income Security Act (ERISA).

Some employers also allow employees to contribution to a ROTH 401 k plan. Deferral to a ROTH 401 k plan are not available for tax deferral and are subject to current income tax.  ROTH 401 k plan do however grow tax free and are not subject to income tax upon withdrawal.

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Tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

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By Jschultz in Tax
A 401 k plan is an employer sponsored plan. Certain requirement must be met before a employee become eligible. for 2013 and 2013 an employee may choose to defer a maximum of $,17,500 on a pre-tax basis. employee’s who are over the age of 50...
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