Richard, age 40, is the owner of Auto Repair, Inc. In addition to Richard, the company has five employees. Richard wants to establish a retirement plan for his employees. He is considering two plans: (1) a Section 401(k) plan and (2) a SEP-IR
A. Assume you are a financial planner and Richard asks for your advice. Answer the following questions.
a. Explain to Richard the advantages and disadvantages of each plan
b. Assume that Auto Repair establishes a 401(k) plan. Employees can elect a salary deferral of up to 6 percent of compensation but not to exceed $17,000 (2012 limit for participants under age 50 .The Company makes a matching contribution of 50 cents for each dollar contributed. James, age 25, is a mechanic who has decided to defer only 3 percent of his wages because of substantial personal expenses. What advice would you give to James?
c. Susan, age 28, is the company's office manager and earns $35,000. She has worked for the company for three years. Can Richard exclude her from participating in the 401(k) plan to hold down retirement contributions?
d. assume that the company instead establishes a SEP-IRA. Michael, age 28, is an eligible employee who earned $50,000 in 2009. What is the maximum annual tax-deductible amount the company can contribute to the SEP-IRA on Michael behalf?
e. Richards wife Maria age 35 is self-employed as freelancer writer after deducting eligible expenses and one-behalf of the social security self-employment tax she has a net income of $ 50,000 of the current tax year. What is the maximum tax deductible contribution Maria can make to defined-contribution Keogh plan?