Do 401(k) Contributions Limit Social Security Benefits?
Written by: Marty Shields
A question we have heard recently is whether contributing to your employer 401(k) or 403(b) plan will limit your social security benefits when you retire. This question comes from the misperception that you don’t pay Federal Insurance Contribution Act (FICA) tax on those contributions. The simple answer is contributions to your employer retirement plan do not limit your social security benefits because although you do not pay federal or state taxes on those contribution you do pay FICA taxes on contributions to your employer 401(k) plan. Therefore, trying to maximize contributions to an employer retirement plan is beneficial to your retirement. In 2015 the contributions limits for 401(k) or 403(b) plans are $18,000 and if you are 50 or older there is an additional catch up contribution amount of $6,000.
So that you understand FICA, it consists of a Social Security tax and Medicare tax. The total FICA tax rate an employee pays is 5.65 percent, which breaks down to 4.2 percent for Social Security and 1.45 percent for Medicare. Employers calculate the FICA tax using your gross pay. There is an annual wage limit for Social Security tax which is $118,500 in 2015. Once your earnings reach this limit, the employer no longer has to deduct Social Security tax from your paycheck
As always, if there are any topics you have questions regarding please let us know and we will answer your questions.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bouchey Financial Group, Ltd. [“Bouchey Financial”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, no portion of this discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bouchey Financial. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Neither Bouchey Financial’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if Bouchey Financial is engaged, or continues to be engaged, to provide investment advisory services. Bouchey Financial is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bouchey Financial’s current written disclosure Brochure and Form CRS discussing our advisory services and fees is available for review upon request or at www.bouchey.com. Please Note: Bouchey Financial does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bouchey Financial’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Bouchey Financial client, please contact Bouchey Financial, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.