Planned Giving

Your act of generosity, our longevity

With planned giving, you can provide long-lasting support for Boys & Girls Clubs of South Puget Sound while enjoying financial benefits for yourself.

Text Resize
Subsribe to RSS Feed
Friday June 5, 2020

Personal Planner

401(k) Retirement Plans

401(k) Retirement Plans

The 401(k) is rapidly becoming the most popular qualified retirement plan. More than 90% of large companies now offer a 401(k). With a 401(k), each employee has an individual account and is permitted to transfer a portion of his or her salary directly into the account each year.

Most 401(k) plans qualify for excluding the contribution from your taxable income each year. However, some employers have created a "Roth 401(k)" plan in which after-tax contributions are made.

To encourage employees to fund a 401(k), some employers also create a matching fund. The employer determines the amount of the match and the maximum. While many different plans are selected by employers, a fairly typical employer match is $1 for $2 of contribution up to 6% of the employee's salary. With this plan, an employee who contributes the full 6% would receive a 3% employer match. Therefore, the total 401(k) contribution that year would be equal to 9% of the employee's income.

Contribution Limits

There are several potential contribution limits for employees. In 2019, the voluntary contribution by the employee is limited to $19,000. However, employees over age 50 during the year are permitted to add a "catch up" contribution of $6,000. The total annual employee contribution for those over age 50 is $25,000 this year. Both limits are indexed for inflation and increase in $500 increments. Some companies also will add a match or other company contribution to that amount.

Most companies have highly compensated employees (HCE) who are subject to specific rules. To make certain that the contributions are fair, the employees with income above a certain threshold and owners of more than 5% of a business are limited in their contributions. There are various "safe harbor" provisions that allow the HCEs to contribute without worrying about the annual contribution tests. For example, if there is a non-elective contribution by the company of 3% or more for all employees, then the plan does not have to meet specific standards for highly compensated employees.

401(k) Investments

The employer will select a custodian of the 401(k) and typically there will be a group of mutual funds for the 401(k) investments. The employee will have opportunity to select from the various mutual funds. These mutual funds are usually in four general categories.

The first category is stock mutual funds. Stocks have a long-term return of approximately 10%. For investments of 20 years or more, a percentage of the 401(k) in stocks will usually be a good decision. Stock funds generally include large cap, medium cap and small capitalization companies. Some funds may favor domestic companies and some foreign.

Stock funds should be fairly diversified to minimize the risk of loss if a company were to fail. A portfolio of large, midsized and small company mutual funds may own shares in 1,000 or more companies.

Bonds are the second type of investment fund. Mid-term and long-term bonds have returned approximately 5.5% during the past 75 years. Because bond values change much more slowly than stock values, the bonds are a more stable investment than stocks and are appropriate for shorter timeframes before retirement. As 401(k) owners move into their 50s, 60s and 70s, the percentage of bonds normally increases and that of stocks decreases. Some advisors suggest that the percentage of bonds should match your age. For example, a person age 60 may choose to hold 60% in bonds and 40% in stocks.

Cash is the third investment option. Most 401(k) plans permit a money market fund or similar option. Returns on cash funds are frequently 1% to 3%, but these cash options preserve principal in a downturn.

Real estate is the fourth investment type. Some 401(k) plans permit real estate investment trust (REIT) investments. Real estate may be a good long-term investment, but also involves substantial potential risk.

401(k) Distributions

There are three general periods of time of importance to traditional 401(k) owners. Prior to age 59½, there is a 10% excise tax on distributions. For a regular 401(k), the owner who takes early distributions would pay both income tax plus the additional 10% excise tax. There are exceptions for disability, substantially equal payments over a lifetime or economic hardship, but most individuals attempt to avoid early withdrawals if possible.

Between age 59½ and age 70½, there is a voluntary distribution option. As a 401(k) owner, you may choose to take distributions to cover living expenses. The distributions may be any amount from the regular 401(k), but will be reported by you as taxable income.

After age 70½ (by April 1 of the following year), the plan owner must take at least the required minimum distribution (RMD). The required minimum distribution starts at approximately 3.8% at age 71 and increases to nearly 8.8% by age 90. With one exception, the distributions by a 401(k) owner are governed by this schedule under the IRS Uniform Table. The exception is a husband and wife in which one spouse is more than 10 years younger. A special table applies in that case.

401(k) Loans

A 401(k) plan document may permit the owner to take a loan from the account. Loans are limited to the lesser of 50% of your plan or $50,000, and must be repaid within five years (except for purchase of a primary residence). A reasonable rate of interest is charged. While the loan is repaid with after-tax dollars, your 401(k) account will grow by the amount of the loan interest.

401(k) Balances

Because the required initial withdrawal amount at age 71 is approximately 3.8%, many individuals with 401(k)s will find that their total fund balance increases until their early to mid-80s. Even with some reduction in balance between ages 85 and 95 because the withdrawal percentages continue to increase, many 401(k) owners will pass away with substantial balances.

Because there is likely to be a significant balance in your 401(k) when you pass away, careful selection of your designated beneficiaries is important. If you pass away with a substantial 401(k) balance, then a significant amount will be distributed to your designated primary or contingent beneficiary. In most cases, your designated beneficiary will have the option of taking distribution of your 401(k) over a term of years.

Published September 27, 2019

Subsribe to RSS Feed

Previous Articles

Social Security

Married Couples and Property

Separate & Joint Property

What Do You Own?

Chronic Illness - Care of Your Property


Gift Options

Donor Stories

Learn how others have made an impact through their acts of giving to our organization and others. Explore the many benefits of charitable gift planning.


How to Give

Learn how to make a gift that provides tax benefits and even life income.


What to Give

Find out what type of assets make the best planned gifts. Learn about gifts of cash, securities and property.


Planned Gifts Calculator

View a presentation that shows the benefits of a planned gift based on your property and goals.



Personal Planner

Bequests to Your Favorite Charity Bequests to charity are the most popular type of planned gift. A donor may retain assets during life and then leave a...


Finance News

Hewlett-Packard Continues Resurgence Treasuries Rise on Mixed Economic Data Interest Rates Stay Low

Savvy Living

Personal Tech Products Designed Specifically for Seniors. Can you recommend any tablets, smartphones or computers that are specifically designed for seniors? I would like to buy...


Washington News

IRS End-of-Year Tax Tips

In IR-2014-110, the IRS offered tax tips for end-of-year charitable giving. 1. Household or Clothing Gifts ? These items must be in good used condition or better..


For Advisor

Advisor Resources

We have a complete tax update service for CPAs, attorneys, CLUs, CFPs, ChFCs, trust officers and other professional friends.


Deduction Calculator

The GiftLaw Calculator is a planned gifts calculator for professionals that follows the IRS format


Private Letter Ruling

Estate Distributes to Foundation without Self-Dealing

Decedent formed Company and subsequently formed Irrevocable Trust...


Washington News

IRS End-of-Year Tax Tips

In IR-2014-110, the IRS offered tax tips for end-of-year charitable giving. 1. Household or Clothing Gifts ? These items must be in good used condition or better.


GiftLaw Pro

Charitable Tax Reference

GiftLaw Pro is a complete charitable giving and tax information service inside the GiftLaw website...


Case of the Week

Living on the Edge, Part 4

Rhea Jones, 75, lives in a beautiful coastal town in northern California. Rhea?s home occupies three...


Article of the Month

Gifts of Pass-Through Business Interests

A charitable gift of a business interest can make a wonderful gift to charity. At the same time,...