Author Topic: Are we "covered" by our company's 401k plan?  (Read 2365 times)

Bchordjam

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Are we "covered" by our company's 401k plan?
« on: November 02, 2013, 11:56:40 AM »
Hey everyone,

I'm trying to figure out if myself and my wife are technically "covered" by our respective company's 401k plan.

This is from the IRS website: http://www.irs.gov/Retirement-Plans/Are-You-Covered-by-an-Employer's-Retirement-Plan%3F

Quote
You’re covered by an employer retirement plan for a tax year if your employer (or your spouse’s employer) has a:

Defined contribution plan (profit-sharing, 401(k), stock bonus and money purchase pension plan) and any contributions or forfeitures were allocated to your account for the plan year ending with or within the tax year;

IRA-based plan (SEP, SARSEP or SIMPLE IRA plan) and you had an amount contributed to your IRA for the plan year that ends with or within the tax year; or

Defined benefit plan (pension plan that pays a retirement benefit spelled out in the plan) and you are eligible to participate for the plan year ending with or within the tax year.
Box 13 on the Form W-2 you receive from your employer should contain a check in the “Retirement plan” box if you are covered. If you are still not certain, check with your (or your spouse’s) employer.
The limits on the amount you can deduct don’t affect the amount you can contribute. However, you can never deduct more than you actually contribute.

We have been contributing to our respective ROTH IRAs over the years when we have been able, and due to our new jobs, this is the first year that we will be able to max them out.  We were both granted access to 401k plans at work as of this year but due to the fact that both of our company's 401k plans have horrible investment option, high fees, long vesting periods, and poor matches we have decided not to partake in them.

The main question is, because we are deciding not to utilize those 401k plans, would we still be considered "covered" by the IRS standards above?

We would like to save inside of a tIRA next year to reduce our taxable income, but there is a good chance that we will have an MAGI greater than the $96000 allowed for a full deduction if we are considered covered by a 401k plan.  If so, it would make sense to just keep contributing to our ROTH IRAs.  If we ARE NOT considered "covered" by a plan due to our not partaking in one, then there will be no worries since we can claim the full deduction.

Thoughts or suggestions?

Joel

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Re: Are we "covered" by our company's 401k plan?
« Reply #1 on: November 02, 2013, 12:08:19 PM »
Yes, your company offers a 401k, therefore you are considered covered. What match do they give? Chances are a 100% return is still going to beat having high fees. Once you leave the company you can roll the funds over.

Bchordjam

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Re: Are we "covered" by our company's 401k plan?
« Reply #2 on: November 02, 2013, 12:31:18 PM »
My company offers a 50% match on the first 2.5% of income contributed, paid out quarterly held in company stock, with a 3 year vesting period.

I don't have the specific numbers for my wife's plan, but I am fairly certain the match and vesting period is the same.

We may or may not be at our jobs long enough to become vested.

Joel

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Re: Are we "covered" by our company's 401k plan?
« Reply #3 on: November 02, 2013, 12:35:02 PM »
Is it a 3-year vesting period that vests a % each year, or is it 0% up until the 3-year time period?

When you say "high fees" just how high of fees are we talking about? 1%?

Bchordjam

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Re: Are we "covered" by our company's 401k plan?
« Reply #4 on: November 02, 2013, 01:03:06 PM »
It is 0% until the 3 year time period.  At that point, the employer contributions vest 100% for that quarter they were contributed.

The fund I would invest in is benchmarked to the S&P 500 and has an expense ratio of 0.62%. There is a yearly administration fee of $21 and there is also mention a total annual operating expense, which I may or may not be responsible for, but I cannot find any further information on it.

My wife and I currently have our Roth IRAs through Vanguard held in VTSAX.

Edit: The actively managed fund, according to the prospectus, trails the benchmark by just over 1% a year as well.
« Last Edit: November 02, 2013, 02:17:48 PM by Bchordjam »