Q—401(k) Plan

These plans allow eligible employees to defer compensation or bonuses and contribute the funds to an employer-sponsored profit sharing plan. They are funded entirely or in part through salary reductions elected by the employees. Because employee participation in 401(k) plans is entirely voluntary, employers will often encourage participation by matching employee contributions. These matching contributions are typically limited to a maximum percentage and/or maximum dollar amount.

One of the better ways of explaining the advantages of participating in a 401(k) plan is to contrast current nonparticipation with the benefits of participation (i.e., a “before and after” presentation).

WITHOUT PARTICIPATION.Assume that in 2022 a 35-year-old married employee with an annual salary of $52,000 currently pays $2,979 in federal income taxes, $840 in state income taxes, and $3,978 in Social Security taxes. This leaves $44,203 of “take-home pay,” with nothing set aside for retirement. (Calculation assumes: joint filing, standard deduction, and 3 percent of federal AGI state income tax.)