401(k) Plans

What is a 401(k) Retirement Plan?

A 401(k) is a defined contribution plan which is offered by employers as an employee benefit. The employee and employer can make contributions into the retirement plan based on the contribution limits set by the Internal Revenue Service (IRS) each year.

The Employee Retirement Income Security Act of 1974 ("ERISA”) outlines all the rules and regulations when it comes to a employee sponsored retirement plan: Employee Retirement Income Security Act (ERISA) | U.S. Department of Labor (dol.gov)

Glover Park Wealth will work with your company and our partners to setup a 401(k) plan that is aligned with the long-term goals and values of your firm.

We have several 401(k) custodian partners that we work with to make sure we design a 401(k) that is cost effective for the company and advantageous to employees to retract talent and promote retirement savings.

Employers can give employees the option of a Traditional 401(k) or Roth 401(k) along with the ability to take loans out against the 401(k) assets.

Traditional 401(k)

Employee contributions into a traditional 401(k) are pre-tax and deducted from gross income on the W-2.

The employee's taxable income is reduced by the total amount of pre-tax 401(K) contributions for the year and recorded as a tax-deduction on the employee’s tax return.

The pre-tax assets grow tax-deferred inside the traditional 401(k) and are taxed as ordinary income when distributions start. 

To learn more about the tax considerations 401(K) distributions, see our tax planning section:

Roth 401(k)

Employee contributions into a Roth 401(k) are on an after-tax basis and not deducted from taxable income.

The after-tax assets grow potentially tax-free inside the Roth 401(k), you must take a qualified withdrawal or distribution.

The contribution limits for the Roth are the same for the traditional 401(k).

To learn more about the tax considerations 401(K) distributions, see our tax planning section:

Eligibility to Contribute:

Employee eligibility requirements such as age and length of employment are determined by the 401(k)-plan administrator and company when the plan adoption documents are established.

  • Note: The 401(k)-plan adoption document or agreement can be edited to make updated to the employee eligibility requirements.

Maximum Annual Contribution:

  • Employer: Profit sharing and match: Up to the lesser of 25% of compensation or $61,000 including employee contributions for 2022

  • Employee (Salary Deferral): Up to the lesser of 100% of compensation or for a maximum of $20,500 ($27,000 if age 50 or older) for 2022.

  • The total combination of employer and employee (salary deferral) contributions may not exceed $61,000 ($67,500 if age 50 or older) for 2022.

Tax-Deductible Contributions for Employer & Employee:

  • Employer contributions are deductible from federal income tax.

  • Employees can make pre-tax contributions using the traditional 401(k).

401(k) Investments:

Glover Park Wealth Management acts as a 3(21) Co-Fiduciary on the 401(k) and provides a low-cost mutual fund lineup which is continuously monitored.

Withdrawal Rules & Taxes:

Pre-tax 401(k) contributions and earnings are subject to income tax and penalties if withdrawn before 59 ½ years old. Roth contributions are withdrawn tax-free.

Roth earnings are tax-free if the withdrawal is considered a qualified distribution. Learn more about “Roth IRA Distributions” 

Withdrawal Penalties:

There is a 10% IRS penalty in a traditional 401(k) if assets are withdrawn before age 59½ unless exception applies.  Retirement Topics Tax on Early Distributions | Internal Revenue Service (irs.gov)

401(k) Distribution Penalty exceptions:

  • Separation of service in the year attaining age 55 or older.
  • Death
  • Disability
  • Substantially equal periodic payments made over life expectancy
  • Qualified military reservist
  • Qualified domestic relations order due to divorce
  • Up to $5,000 for qualified adoption/birth expenses

Required Withdrawals (RMD):

Beginning in tax year 2020, the Required Minimum Distributions (RMDs) to start taking qualified distributions or withdrawals changed from age 70½ to age 72 (However, this does not affect participants who turned 70½ on or before 12/31/2019.)

If you are still employed by the employer sponsored retirement plan: 401(k), 403(b), Simple IRA or small-business account then your RMDs may be delayed until the year of retirement.

Keep in mind, some expectations do apply, and we recommend that you meet with your CPA or Tax Advisor.

ERISA Retirement Plan Startup Deadline:

  • For years after 2020, 401(k) plans may be set up by the tax filing deadlines plus extensions.

  • Employee salary deferral contribution(s) must be deducted from participants’ paychecks.

  • Employer contributions or profit sharing may be made by the tax filing date plus allowable extensions.