401(k) Misunderstanding w/ Contribution Limits

I realize that the majority of you already know this, but I would guess there may be a few that do not.

I was always under the assumption that 401(k) employee contributions AND employer contributions totaled together had to be less than the IRS specific limits (i.e. $16,500 for 2011). This is not true as that $16,500 limit is only for employee contribution. There is a separate, but higher limit for employer contributions that most likely very few people here come close to touching.. For the past four years I have contributing less than I could have to my retirement. Doh!

I have always been ensuring my employers 5% match was calculated into my yearly contribution total (i.e. MyContribution = $16,500 - SAL*0.05).

Anyway I'm sure will take some serious red for posting the obvious and can only hope this helps at least one person not repeat the same mistake I have. Luckily I'm only 26 so I have some time to make it up.

While it might be the case for your employer, everyone needs to check the plan description before taking your advice. For example, on my 457 plan, I had some unexpected overtime at the end of the year and so I hit the $16,500 limit. The employer match came after my contribution and so I lost the employer match for that pay period. I knew coming in this was the case because I read the plan description, which says that employer match is put in after all employee contributions, and is subject to the IRS limit.

I'll admit I was a little confused by this but did figure it out. Thanks for being willing to share a mistake.

calwatch said:   While it might be the case for your employer, everyone needs to check the plan description before taking your advice. For example, on my 457 plan, I had some unexpected overtime at the end of the year and so I hit the $16,500 limit. The employer match came after my contribution and so I lost the employer match for that pay period. I knew coming in this was the case because I read the plan description, which says that employer match is put in after all employee contributions, and is subject to the IRS limit.

There is another interesting twist that people should be aware of with respect to employer match. Let us say that the employer matches the first 3% and you could do one of the following 2:

1. Contribute only for 6 months at 12% of your salary and max out at 16,500
2. Contribute consistently and steady for the full year at 6%

Better take the 2nd choice. With the first choice, you get the 3% match, remaining 9% remains unmatched. Once 6 months are up, since you are not contributing any more, there is no more employer match. However, if you had taken option #2, you will get contribution at 3% from the employer for the full year.

PrincipalMember said:   calwatch said:   While it might be the case for your employer, everyone needs to check the plan description before taking your advice. For example, on my 457 plan, I had some unexpected overtime at the end of the year and so I hit the $16,500 limit. The employer match came after my contribution and so I lost the employer match for that pay period. I knew coming in this was the case because I read the plan description, which says that employer match is put in after all employee contributions, and is subject to the IRS limit.

There is another interesting twist that people should be aware of with respect to employer match. Let us say that the employer matches the first 3% and you could do one of the following 2:

1. Contribute only for 6 months at 12% of your salary and max out at 16,500
2. Contribute consistently and steady for the full year at 6%

Better take the 2nd choice. With the first choice, you get the 3% match, remaining 9% remains unmatched. Once 6 months are up, since you are not contributing any more, there is no more employer match. However, if you had taken option #2, you will get contribution at 3% from the employer for the full year.

this is ENTIRELY dependent on how your company matches. If they match X% per pay check, it is very different than X% of total compensation. Bottom line is, ask your HR person who is in charge of 401k, and if they aren't sure, insist that they find out. That is part of their job.

For example, this is the language in our Summary Plan Description:

The annual contribution limit is the lesser of 100% of your Includible Compensation and the applicable dollar limit, as defined by the Code for that Plan year and as shown in Table A:
(Table A the IRS chart with the regular, Age 50+, and Catch-Up Contributions)

The annual contribution limit will be indexed for inflation
in future years. According to Internal Revenue Service
(IRS) regulations, the increases can only take place in $500
increments and may not occur every year.

The contribution limit includes your payroll deferrals and
any [Employer] matching contributions. For employees who are
eligible to contribute to more than one plan that is intended
to be an eligible deferred compensation plan under Code
section 457, the limit may include contributions to the other
plan. In addition, Participants in the 457 plan who also participate
in the 401(k) plan may be subject
to a “combined lower limit,” which affects both plans. If you
have questions about limits, please contact the [Plan].

Remember that the annual limits include your deferrals
and the [Employer] matching contributions (up to 4% of your
Compensation). If your annual contribution objective is to
reach the annual limit, be sure to take into account all before-
tax contributions to your 457 account when you are
electing a deferral percentage.
If the annual limit is reached before the end of the year, your
deferrals and the [Employer] matching contributions to the Plan
will stop automatically. If this happens, you will notice that
your deduction and [Employer] match for the Plan will both
be zero on your pay stub. Contributions will begin again
automatically in January of the next year unless you change
the monthly deferral percentage before then. If for some
reason the limits are exceeded in a year, the Plan will refund
to you the excess deferrals plus earnings and you will be taxed
on the refunded amounts.

This employer matches paycheck by paycheck, AND counts in the employer contribution into the plan maximum. In addition, employee contributions come in first, followed by matching contributions. This is why reading the brochures provided by the employer and/or asking the benefits person in HR, or the plan provider, is important.

I had the same misunderstanding and did not max out last year.

I found it earlier this year and made sure that I contribute at least $16500.

The great thing is that my plan will reject further contribution once you reach the max.

aks123 said:   Is there any lock-down period for employee contribution?

I mean you have to work with certain employer for certain years before you can get employee+employer otherwise your employer part will be fore fitted.

Employee contributions are immediately yours. As for employer contributions, it is called vesting, and the exact terms vary from one employer to the next. Check your plan documents and ask HR.

sunspotzsz said:   I had the same misunderstanding and did not max out last year.

I found it earlier this year and made sure that I contribute at least $16500.

The great thing is that my plan will reject further contribution once you reach the max.

Why does even get to the point of reject? Your payroll should be tracking your 401K and whenever it reaches 16500, it should stop automatically. The last few years, I've had this happen to me in Oct/Nov. I dont mind that its not spread over the year since:
- I dont have employer match (that part sucks) and
- I have a variable aspect to my comp which is hard to predict before hand.

TheWalL said:   dmagid7 said:   Hi, related to 401K... would someone know the answer... I am contributing and company matching 6%. The whole amount is already vested. What happens if I want to withdraw the whole amount for personal use/ reason.
I researched that a bit and it seems that I will pay taxes and 10% penalty. It seems it forth it if that the case because of company 6% match.
I know that the benefit and purpose of 401K is to use it at the retirement age etc... but my life circumstances may demand moving to another country and I may need to withdraw.

Does anyone know?
Thank you!

You cant take out the money from a current employer's 401K. Your plan may allow you to take a loan against the balance.
If its a former employer, then depending on the amount in it and length of time the account is open, you'll be liable for taxes and penalties. To minimize the penalties, make sure you're over the time limit (5 years in many cases but may also depend on your age...should be noted in your plan docs). Also, if you have no other US income, spread your draw from the account in such a way that it maybe eliminating the taxbill completely. Consult a qualified, certified and experienced tax advisor for strategies around this. This can get complicated so dont monkey around with it and end up having to pay a huge tax bill later on.

Why would he worry about tax liability if he's not planning to come back?

Thanks guys for positive encouragement!

To recap some of the comments on here I work for the Federal Government and have the Thrift Savings Plan (TSP). My agency requires continuous contribution to get matched and they do not do a "true-up" at the end of the year. I imagine there are some GOVies on here so that information might be useful. Also most federal positions are vested after 3 years of service.

What I have learned from this is if I go to the private sector I would try to negotiate with my new employer to contribute heavily to my 401k.

My next financial goals are to tackle are switching to a HDHP w/HSA and determining if I can bulk contribute to my Roth IRA once a year to take advantage/speculate of a downswing in an ETF. I know there is risk with that Roth IRA strategy rather than contributing frequently throughout the year. Perhaps I'll start some new threads once I research and device my HSA/Roth strategies.

Don't feel too bad about your mistake. The question comes up *a lot*.

-mike

i generally contribute few hundred $ less than $16.5k to accommodate for my yearly raises . so for example if my monthly contribution is 19.6% of my gross to reach 16.5K annual limit . i will contribute only 19% .

givememoredeals said:   How are you guys out there maxing our your 401K contributions? I have ppl at work that cant even put $5000 a year and provide food for the family. My employer matches 5% of my salary, any tips on making more on this?Pay yourself first. It's amazing what you can live on if you never see it to begin with.

If you can't seem to afford to contribute more, then next time your salary increases, increase your 401k contribution by the same amount. In other words, don't put the raise in your take home pay; put the raise in your savings instead.

And anyone not contributing enough to get the full company match should have their head examined. If I offered you a twenty dollar bill for every ten dollar bill you gave me, would you take it?

manuvns said:   i generally contribute few hundred $ less than $16.5k to accommodate for my yearly raises . so for example if my monthly contribution is 19.6% of my gross to reach 16.5K annual limit . i will contribute only 19% .Why? If the concern is that your employer only matches a portion of your contribution, such that if you max out your annual contribution limit early, you won't receive the employer match for the remaining portion of the year, then your approach doesn't really alleviate any of those concerns, as the difference that you are describing appears to be very small.

There are some people who are concerned that if they exceed the annual contribution limit, their excess contributions will be forfeited. They won't be. What happens is one of two things: 1) the company will catch the fact that you've hit your annual contribution limit and automatically stop any additional contributions, or 2) if the excess contributions are still made, you have until the tax filing deadline to request those back without a penalty (it's best if the request is made by March 1, such that it is processed by the regular tax filing deadline of April 15/16/17).

HighTechnology said:   scottybweyy said:   What I have learned from this is if I go to the private sector I would try to negotiate with my new employer to contribute heavily to my 401k.



You really can't negotiate what the company contributes to your 401(k) -- 401(k) plans are IRS tax qualified retirement plans, which are governed by the official plan document adopted by the company and are subject to a lot of rules. These complicated and often convoluted rules make it very difficult to negotiate with an employer for a better match. Best you'll likely be able to negotiate is a higher salary so you can contribute more to the plan (up to the $16,500 (as indexed) of course).That's absolutely correct. Having said that, depending on the situation, there are certain related things that may be negotiable. If the employer's 401(k) eligibility and/or employer match only applies to full time employee and you want to work part time, it can sometimes be possible to negotiate with the employer to be treated as a full time employee for benefits purposes.

Something else that people should also check on is whether the position will give the person access to more than one retirement plan. For instance, it is not at all uncommon for certain employer types to give their employees access not just to the 403(b) with its $16,5000/year contribution limit but also to the 457(b), which will give you an additional $16,500/year contribution limit. So, in that situation, the same person would have the ability to shiled up to $33,000/year from taxation. It goes without saying that if you are like one of the posters above who can't afford to contribute $5,000/year towards retirement, increased contribution limits are of purely academic interest. If you do have the money and want to put more away, however, this is a very valuable benefit to inquire about.

joedaddy123 said:   dcwilbur said:   And anyone not contributing enough to get the full company match should have their head examined. If I offered you a twenty dollar bill for every ten dollar bill you gave me, would you take it?

noDo tell.

geo123 said:   manuvns said:   What happens is one of two things: 1) the company will catch the fact that you've hit your annual contribution limit and automatically stop any additional contributions,

What if the contribution was automatically stopped by the company before year end due to max out, but on the following year the company did not resume your contributions due to human errors\system glitches, and you did not catch it until more than 1 year later, way past the tax filing deadline? Anything you can do you recoup the loss (tax savings mostly)?

BE said:   What if the contribution was automatically stopped by the company before year end due to max out, but on the following year the company did not resume your contributions due to human errorssystem glitches, and you did not catch it until more than 1 year later, way past the tax filing deadline? Anything you can do you recoup the loss (tax savings mostly)?The answer to your question is "no," if the contributions weren't made and you didn't catch it until way past the tax filing deadline, then there's nothing that you can do.

Just out of curiosity, however, how can it possibly happen that you wouldn't notice a $16,500 swing in your taxable compensation, and the absence of any retirement deductions on your paystubs/W2, for about a year and a half?

scottybweyy said:   You sparked an idea in my head. I wonder how effective it is to max out as much as you can (100% a pay period for GOV) at the beginning of the year if your employer allows it. Hypothetically an employee making 52k with 5% matching could invest according to the following into their TSP with the GOV to earn more interest...But if you are investing in the S fund, then you aren't earning interest, per se. Your theory of investing more money sooner makes sense though in general terms.

davneil said:   You should not try to max out though I have done and I am doing but only if you have surplus money and you are earning so that tax will be high otherwise there is no intelligent way to invest 401k, most of the money will eventually loose value vs if you can buy a fix-upper and live in it, you may be better off. Some people worrying way too early, time to think is 35+ onwards than 22. If you are worried around 22 then you may not be living your more expensive life fully. I am typical frugal person but learned over years that I missed the boat of life in frugal living.

In my situation, my company matches 75% up to an 8% employee contribution. In otherwords, if I contribute $100 to my retirement fund, they will contribute an additional $75. Even Mad Jack McMad can see the financial sense in this. I bought a fixer-upper in 2008 in Southern CA for $200k that sold in 2005 for $400k. I needed some money for repairs so I took a loan out of my 401k and pay it back to myself at a 4.25% interest rate. The only cost was a $75 admin fee (and the opportunity cost, although the economy was in the toilet).

I do think you should have fun while you're young though the OP obviously can afford to invest in his or her retirement and still pay the bills. The difference in compound interest in starting at 22 as opposed to 35 are a *lot* higher than you would think.