Question

Matthew (48 at year-end) develops cutting-edge technology for SV Inc., located in Silicon Valley. In 2020, 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 $422,000,

a-1. What amount will SV contribute to Matthew’s money purchase plan?
a-2. What can Matthew contribute to his 401(k) account in 2020?

Answer 1

Answer:-1. What amount will SV contribute to Matthew’s money purchase plan?

SV contributes 15 percent of an employee's salary to the money purchase pension plan up to the amount limited by the tax code. For 2020, the annual limit on contributions to a money purchase pension plan is $57,000.

Matthew's annual salary is $422,000, and SV will contribute 15 percent of that salary:

SV Contribution = 15% of $422,000 = 0.15 * $422,000 = $63,300

However, since the limit for 2020 is $57,000, SV will contribute the maximum allowed by the tax code, which is $57,000.

a-2. What can Matthew contribute to his 401(k) account in 2020?

In 2020, the annual contribution limit for an individual to a 401(k) plan is $19,500 for individuals under the age of 50. However, since Matthew is 48 years old, he falls into this category.

So, Matthew can contribute up to $19,500 to his 401(k) account in 2020.

Please note that if Matthew reaches the age of 50 or older during the year (which is not the case in this scenario), he would be eligible for catch-up contributions, allowing him to contribute an additional $6,500 for a total of $26,000 to his 401(k) account.