Auto Repair, Inc.

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: a Section 401(k) plan and a SEP- IRA. 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 $18,000 (2015 limit for participants under age 50). The company makes a matching contribution of 50 cents for each dollar contributed. Pete, 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 Pete? c. Sue, age 28, is the company’s office manager and earns $35,000. She has worked for the company for 3 years. Can Richard exclude her from participating in the 401(k) plan to hold down retirement contributions? Explain your answer. 

JD, age 26, is a self-employed plumber. One month ago, he hired his brother, age 20, to help in the business. JD wants to accumulate a retirement fund and decides to adopt a 401(k) plan to fund his retirement. JD’s net earnings (after certain adjustments) are $80,000. a. What is the maximum tax-deductible contribution JD can make to the 401(k) plan? b. Does JD have to include his brother in his 401(k) plan? Explain your answer.

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