Question

Matthew (48 at year-end) develops cutting-edge technology for SV Inc., located in Silicon Valley. In 2019, Matthew participates in SV’s money purchase pension plan (a defined contribution plan) and in his company’s 401(k) plan. Under the money purchase pension plan, SV contributes 15 percent of an employee’s salary to a retirement account for the employee up to the amount limited by the tax code. Because it provides the money purchase pension plan, SV does not contribute to the employee’s 401(k) plan. Matthew would like to maximize his contribution to his 401(k) account after SV’s contribution to the money purchase plan.

Assuming Matthew’s annual salary is $246,000,

1. b-1. What amount will SV contribute to Matthew’s money purchase plan?
2. b-2. What can Matthew contribute to his 401(k) account in 2019?

Answer 1

Answer b-1

In the money purchase plan,

1) Is an annual employer contribution to its employees retirement savings.
2) Employees do not contribute to this plan.
3) They can have 401(k) plan as well.
For 2020, the overall contribution limits allowed by the IRS are the lesser of 25% of employees compensation or 57,000.

Here Matthew's annual salary is $ 2,46,000 and SV contributes 15% which is 36,900 which is lesser than the prescribed ceiling by IRS, hence the amount which SV contributes is 36,900.

Answer b-2

The limit prescribed by IRS for 2019 for employees who participate in 401(k) is $ 19,000.Prescribed % is 10 to 20% but since Mr.Mattew contribution in such case would exceed the prescribed ceiling of IRS, hence the amount which Matthew could contribute is $ 19,000.