Retirement Savings and Deferred Compensation

Step 1: Identify the Annual Compensation Limits
The IRS limits how much salary can be used for calculations. For 2022–2024, those limits were $305,000, $330,000, and $345,000. Even though Haley made $1M, only these amounts count.

Step 2: Calculate the "High-3" Average
Add the three limits and divide by three:
$$(\$305,000 + \$330,000 + \$345,000) \div 3 = \mathbf{\$326,667}$$

Step 3: Identify the Maximum Payout Limit
For 2025, the IRS caps the actual payment at $280,000. You cannot receive more than this, no matter how long you work.

Step 4: Determine the Percentage Needed
Find what percentage of her average salary equals the cap:
$$\$280,000 \div \$326,667 = \mathbf{85.71\%}$$

Step 5: Calculate Minimum Years
Since she earns 3% per year, divide the needed percentage by 3%:
$$85.71\% \div 3\% = \mathbf{28.57 \text{ years}} $$

Step 1: Determine the "Service Percentage"

• Alicia worked 35 years and earns 2% per year.

• $35 \text{ years} \times 2\% = \mathbf{70\%}$ total benefit rate.

Step 2: Apply IRS Compensation Caps

• Alicia’s actual salaries ($612k, $663k, $714k) are all way over the limit.

• Use the IRS limits instead: $305,000 (2022), $330,000 (2023), and $345,000 (2024).

Step 3: Calculate the "High-3" Average

• Add the limits: $\$305,000 + \$330,000 + \$345,000 = \$980,000$.

• Divide by 3: $\$980,000 \div 3 = \mathbf{\$326,667}$.

Step 4: Calculate the Preliminary Benefit

• Apply her 70% rate to the average: $\$326,667 \times 70\% = \mathbf{\$228,667}$.

Step 5: The "Lesser Of" Rule (Final Answer)

• Compare her calculated benefit ($228,667) to the 2025 IRS Payout Limit ($280,000).

• Since $228,667 is lower, that is her maximum benefit.

Nina’s 401(k) After-Tax Accumulation

• Step 1: Identify the Initial Contribution

  • Nina contributes 10% of her $100,000 salary.

  • $\$100,000 \times 10\% = \mathbf{\$10,000}$ (Before-tax contribution).

• Step 2: Calculate the Future Value (FV)

  • The money grows at 7% for 25 years.

  • Use the FV factor: $1.07^{25} \approx 5.42743$.

  • $\$10,000 \times 5.4274 = \mathbf{\$54,274}$ (Total value at retirement).

• Step 3: Account for Taxes at Retirement

  • Since it’s a traditional 401(k), the entire distribution is taxable.

  • Marginal tax rate at retirement = 30%.

  • $\$54,274 \times 30\% = \mathbf{\$16,282}$ in taxes owed.

• Step 4: The Final After-Tax Result

  • Subtract the taxes from the total value:

  • $\$54,274 - \$16,282 = \mathbf{\$37,992}$.

401(k) Investment Risk & Value

• Step 1: Identify the Risk-Bearer

  • In a defined contribution plan (401k), the employee bears all investment risk.

• Step 2: Total Accumulation Math

  • Take the Annual Contribution ($10,000) $\times$ Future Value Factor ($1.07^{25}$).

  • Result: $54,274 total account value.

Problem 5: Traditional 401(k) Cash-Out Logic

• Step 1: The Tax Hit

  • Traditional 401(k)s are "pre-tax." This means 100% of the withdrawal is taxed at your future rate.

• Step 2: Calculate After-Tax Proceeds

  • Total Value ($54,274) $\times$ (1 - Retirement Tax Rate 30%).

  • Result: $37,992 actual cash in hand.

401(k) After-Tax Accumulation (30% Tax Rate)

• Step 1: Annual Contribution

  • Salary ($100,000) $\times$ Contribution Rate (10%) = $10,000.

• Step 2: Future Value (FV) Growth

  • Apply the 7% growth factor over 25 years ($1.07^{25}$).

  • $10,000 \times 5.42743 = \mathbf{\$54,274}$ total at retirement.

• Step 3: Tax Calculation

  • Since it's a Traditional 401(k), the total is taxed at the retirement rate.

  • $54,274 \times 30\% = \mathbf{\$16,282}$ in taxes.

• Step 4: Final After-Tax Proceeds

  • $54,274 - 16,282 = \mathbf{\$37,992}$.