Question

Amber's employer, Lavender, Inc., has a § 401(k) plan that permits salary deferral elections by its employees. Amber's salary is $99,000, and her marginal tax rate is 24% and she is 42 years old.

a. What is the maximum amount Amber can elect for salary deferral treatment for 2019?
$

The annual limitations on contributions to and benefits from qualified plans appearing in § 415 must be written into a qualified plan. Section 404 sets the limits on deductibility applicable to the employer. The limit on the amount deductible under § 404 may have an impact on the amount the employer is willing to contribute. In fact, a defined benefit plan or defined contribution plan is not allowed a deduction for the amount that exceeds the § 415 limitations.

b. If Amber elects salary deferral treatment for the above amount, how much can she save in taxes?

Her tax liability for 2019 would be reduced by $.

c. What is the recommended amount that Amber should elect as salary deferral treatment for 2019?
$.

Answer 1

Part A

The maximum amount Amber can elect section 401 (k) plan salary deferral for 2019 is $19000

Part B

Amber’s tax liability for 2019 would be reduced by $4560 (19000*24%).

Because the salary deferral was elected.

Part C

Recommended amount that Amber should elect as salary deferral treatment for 2019 = $19000 (maximum amount is recommended because due to the election of the maximum amount would reduce tax liability and maximizes contribution to retirement fund.)