Maximizing Contributions in a Money Purchase Plan

What is the total maximum allowable contribution for a participant in a money purchase plan if their compensatory salary is $220,000?

• A. $44,000
• B. $53,000
• C. $25,000
• D. $60,000

Answer: (B)

In a money purchase plan, the maximum contribution is typically determined based on a percentage of the participant's compensation, subject to certain limits established by the IRS. For defined contribution plans, including money purchase plans, the overall contribution limit for an individual is based on their salary and the regulatory ceiling. The IRS limits allows contributions to a money purchase plan up to 25% of the participant's compensation. In this case, with a compensatory salary of $220,000, the calculation would involve taking 25% of that amount. 25% of $220,000 is calculated as follows: 0.25 x $220,000 = $55,000. However, there is an annual contribution limit for total contributions to defined contribution plans, which is $66,000 for the 2023 tax year. Additionally, if the participant is age 50 or older, they can make a catch-up contribution of an additional $7,500. Therefore, for a participant under the age of 50, the maximum allowable contribution would not exceed $55,000 when calculated based on the salary percentage and is within the overall contribution limits for defined contribution plans, making the correct answer $53,000—reflective of the contributions allowed to this

Are you looking to maximize your savings in a money purchase plan? Well, here’s a question that might’ve popped into your mind: "What’s the maximum allowable contribution if my compensatory salary is $220,000?" Spoiler alert: the answer is $53,000. Let’s unpack that a bit, shall we?

First off, a money purchase plan is like your trusty toolbox when it comes to retirement savings. It offers a structured way to consistently contribute toward your nest egg, and understanding the rules can help unlock your savings potential.

To start with, the contribution limits for such plans are largely dictated by the IRS. They set forth the framework that includes how much of your salary you can contribute each year. For a money purchase plan, you can contribute up to 25% of your compensation. Think about it—if you're earning a solid salary like $220,000, that’s a hearty chunk of change, right?

So let’s do the math: you take 25% of that $220,000. Crunching the numbers gives us:

0.25 x $220,000 = $55,000.

Now, this is where it gets a bit tricky. While $55,000 sounds great, the IRS puts a cap on total contributions to defined contribution plans, which is $66,000 for the 2023 tax year. Confusing? Just hang tight!

If you’re under the age of 50, the $55,000 stands as your limit—but wait! What's this? There’s also a catch-up contribution if you’ve hit that age milestone of 50 or older, allowing you an additional $7,500. But again, if you're under that golden age, you’ll stick with that $55,000 limit.

Ah, now let’s circle back to our question: If your calculated contribution is $55,000 but the actual limit set for contributions to defined contribution plans is $66,000, you must also consider your overall yearly contribution. The maximum allowable contribution you can make, which is $53,000, reflects these provisions.

It’s all about keeping within those regulatory confines set by the IRS—the plan is to ensure you save responsibly while aiming for that comfortable retirement lifestyle. And who knows, doing this math might even help you feel a bit more savvy when it comes to managing your financial future!

Lastly, remember that knowing the contribution limits is just one piece of the retirement planning puzzle. So keep learning, stay informed, and don’t forget to consult with a financial advisor to tailor your contributions to your unique situation. Happy planning!