The 401(K)

As a metaphor for claiming your double portion.

by Chuma Megafu

The People of Judea christian belief often use the term double portion to refer to over and beyond blessings or gifts.There are six instances in the
Bible where specific references are made to double portion with the most notable one being, toward the end of Prophet Elijah’s Ministry.
He offered his assistant Elisha a gift: ‘ what can I do for you before I am taken from away? Elisha answered ,’ Please let there
be a double portion of your spirit on me’.(2:Kings2:9) Sure enough Elisha performed double the miracles of Elijah, showing he was
indeed granted a double portion. So also you can use the 401(k) to claim your double portion.

The 401(k) enacted into law in 1978 by congress, it was intended to give taxpayers a break on taxes on deferred income.
It wasn’t untill 1980 that Ted Benna regarded as the father of the 401(k) took note of this obscure provision and figured out
that it could be used to create a 401(k) plan, which simply is an arrangment that allows an employee to choose between
taking compensation in cash or deferring a percentage of it to a 401(k) account. The amount deferred is usually not taxable
to the employee until it is withdrawn or distributed from the plan.Several variations of the 401(K) has since emerged such
as the Roth 401(k) which can be funded with after tax dollars , but for the sake of simplicity I will limit dicussion to the traditional

The other popular feature of the 401(k) plan is called The Match. This is when an employer matches a percentage of employee
compensation up to a certain portion of total salary. For example assume your employer offers 100% on all your contribution
each year up to a maximum 3% of your annual income . If you earn $60,000.00, the maximum amount your employer will contribute
will be $1,800.00 , if you contribute $5000.00 and your employer maxes out the matching requirememnt it will give you a total
contribution of $6800.00 in a year. The pretax contributions earning from investment in a 401(k) account(in the form of interest, dividends and capital gains)
and the resulting compounding interest with delayed taxation becomes a very powerful vechicle to accumalate wealth when held over
long periods of time. In other words all things being equal the money just sits there and grows.

The IRS imposes severe restrictions on withdrawals from 401(k) plans and imposes a 10% excise tax equal to the amount distributed
when the taxpayer is under the age of 59 1/2 ( this is on top of the ordinary income tax that has to be paid). However the last
economic meltdown of 08/09 saw many taxpayers in financial distress and dipping into their 401(k) and opting to pay the penalties
with the often familiar phares, ‘I had no where else to go’. There are some exception allowed by the IRS on the 10% excise tax which
distribution after death or disability of the employeee
distribution made under a qualified domestic relations order(usally done during divorce)
distribution to pay medical bills exceeding 10% of adjusted gross income
distribution taken as a series ofsubstantially equal peridic payments over the taxpayer’s life
distribution done for hardship as defined under the plan
distribution to correct excess contributions or deferrals

Section 72(p) of the IRS codes also allows employees to take loans from their 401(k) plans if the employer offers it.The
loans itself is not taxabe income nor subject to the 10% penalty and must be paid back for a term not longer than 5years
with a reasonable rate of interest charged. If employee do not adhere to the strict guidelines of Section 72(p) the loan is declared in default
and becomes a taxable distribution. This i see happen very frequently.

Account owners must begin making distribution by April 1, of the calender year after turning age 70 or April 1, of the calender
after retiring. The amount of the distribution is based on life expectancy according to appropriate IRS tables. The penalty for
not making the required minimum distribution is 50% of the amount that should have been distributed, one of the most severe
penalties the IRS applies.

The 401(k) plan is not without its detractors , the most vocal being the man who created it in the first place, Ted Benna. He
laments he as created a monster and feels wall street firms are racking too much in fees to manage 401(k) plans he also feels
and that the 401(k) is susceptible to the volaitility of the market.He futher laments that the 401(k) has eclipsed the defined benefit
plan (which guarantees a fixed payment) as primary retirement plan. According to Investment Company Institute as of March 31
of 2016 Americans held $4.8 trillion in 401(k).

All in all when planned properly , 401(K) is an exceptional wonderful program to earn over and beyond what should have been,
in that you have an employer match your savings which grows tax free in the plan. When you retire and distribution starts
chances are you are in a lower tax bracket.

This has been only a summary of the 401(k) plan. As the saying goes “there is more than six after five” and it can get very complicated
and involved . It can also be used as a tax planning tool. For further discssion on using 401(k) as a tax planning tool please contact
us at …. Prime Financial and Tax Service ..323-933-4183