|Readers Also Like 401(k) Contributions Are Not Always Good|
|The New Retirement Rulebook|
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage. By Richard Schmitt NEW YORK ( TheStreet) -- With all of the heated hubbub about how the top 1% of earners control a third of the wealth in the U.S., perhaps you may be wondering how prominently 401(k) wealth figures into the dismay felt by the other 99% in the Occupy Wall Street movement. Past and current economic policies promoting capitalism -- and yes, bailouts too -- get a lot of the blame for the current clash of the classes. When you consider the current high number of unemployed, underemployed, and those otherwise squeezed by lower wages who are unable to save in employer-sponsored retirement plans, you might very well conclude that the distribution of retirement savings wealth would be just one more ingredient leaving a bitter taste with the class warfare mongers. But wait a second! 401(k) and other retirement plans are subject to a slew of rules designed to give the little guy the same type of tax advantages enjoyed by the rich. What the tax law giveth in the form of enabling employees to save a portion of pay and accumulate investment earnings thereon in tax-deferred retirement savings accounts, it also taketh away through big-brother mandates dictating to whom and to what extent these tax advantages can be offered. First, a 401(k) plan must satisfy general coverage and benefit rules that govern tax-qualified plan eligibility and benefit limits. Retirement plans covering at least 70% of eligible employees over age 21 with at least one year of service meet one coverage test. Then, for 2012, various benefit restrictions limit the annual amount of 401(k): 1) Employee pre-tax and Roth contributions from earnings to $17,000 for an employee under age 50 and $22,500 for an employee reaching age 50 by 2012; 2) Overall employee and employer contributions and nonvested forfeitures to the lesser of $50,000 or 100% of pay; and 3) Pay "only" up to $250,000 that may be recognized for contribution purposes. If those limits are not enough, a 401(k) plan has to satisfy nondiscrimination standards requiring that the amounts contributed to accounts of highly-paid employees (generally making $115,000 annually) depend directly upon how much is contributed for non-highly-paid employees' accounts.
Finally, if all of these limits still do not succeed in keeping fat cats' retirement savings account balances in check, "top-heavy" plans with balances concentrated at least 60% in the accounts of key employees (generally officers paid at least $165,000 annually) must provide more liberal eligibility, vesting, and contributions to non-key employees to retain the plan's tax benefits. That's why many plan sponsors hire trained consultants to wade through the red tape of keeping their 401(k) plans running smoothly. The good news for all is that the filthy rich are not the only ones enjoying the tax preferences afforded retirement savings accounts. Over 50 million people currently participate in a 401(k) plan. While not exactly a perfect remedy for the imbalance of fortunes across society, it turns out that tax policy has proven somewhat effective in spreading retirement savings wealth among more of the populace. Instead of just the top 1% earners holding too many of the marbles, it takes around 15% of the top earners to control one-third of retirement savings wealth.* This more even distribution of retirement wealth just goes to show you that maybe the embarrassingly well-to-do are a little bit more like the rest of us when it comes to how much they can enjoy the tax benefits of participating in a 401(k) plan. This article was written by Richard Schmitt, author of "401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day." Outside of his appearances on Fox Business News, KCBS, and Business News Talk Radio, he is an Adjunct Professor teaching retirement planning at the Edward S. Ageno School of Business at Golden Gate University.