Question

Retirement Planning 1. Most retirement plans today are of the defined contribution variety. An example is a 401(k) plan. Suppose your first employer after graduation from college offers a 401(k) plan, you will make contributions from each paycheck, and your employer will match your contributions up to 3% of your salary. a. Explain vesting in a company retirement plan. Does vesting apply to company contributions only, your contributions only, or to both? b. According to the WSJ readings how much (what percentage of income) should you contribute to your 401(k) at minimum? c. Find (on the internet) and provide the 401(k) maximum contribution limit for 2019 for a person under 50. d. People tend to change jobs more frequently today than they did in the past. Suppose you work for five years at your first firm, then change jobs to move to a better position with another firm. At your age, why would it be a bad idea to take your 401(k) account balance in cash and go on vacation between jobs?

Answer 1

a) In a company retirement plan vesting means ownership. This means an employee will vest, or own a certain percentage of his/her account in the retirement plan each year. For eg and employee who is 90% vested owns 90% of the retirement account balance and the employer cannot forfiet or take it back under any curcumstance.

Contribution made by employee are always 100% vested or owned by the employee.

Vesting may be applied to contribution made by the employer based on type of plan the employer sponsors. For eg SEP & SIMPLE IRA are always 100% vested. Other than that employer may choose option of

1)Immediate vesting - where all the contribution are immediately vested or owned by employee

2) Graded vesting - where the vesting percentage keeps on increasing untill it is 100% based on a schedule ( usually 2 to 6 years)

3)Cliff vesting - where an employee will not be vested at all for a particular period but will become 100% vested after a predetermined period ( usually 1 to 3 years)

b) Acoording to WSJ studies you should contribute a minimum of 15% of your salary to your 401(k) account

c) 401(k) maximum contribution limit for 2019 for a person under 50 is $19000

d) It will be a bad idea at his age (which will be less than 59$1/2) to take out 401(k) account balance in cash for the vacation because of the following reasons

1) There will be tax cut on withdrwal based on his/her federal tax bracket

2) There will be a penalty of 10%

3) He/She will not be able to save more fund for his retirement