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401k starting mid-year
Old 10-13-2016, 12:43 PM   #1
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401k starting mid-year

I work for a small employer. Until now we have not had a 401k. Each year I put the max allowable into a TIRA which drops my AGI by that amount and my taxes are reduced.

My employer is now offering a 401k. First payroll deduction will be end of Oct. if the stars align properly. My understanding is you cannot deduct IRA contribs if you have an employer "defined plan" (a 401k).

My question is: Is there any provision in the IRA/401k rules that deal with a 401k that's started near end of the year? My issue is, I'm not sure I can deduct enough from my paycheck in the 8 weeks left in the year to match what I was putting in an IRA.

GM
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Old 10-13-2016, 12:52 PM   #2
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You can deduct traditional IRA contributions while contributing to a 401k if your income does not exceed the MAGI limits. I don't know of anything that cares when during the year you start contributing to the 401k.
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Old 10-13-2016, 12:54 PM   #3
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402(g) and 414(v) limits apply to a calendar year I believe, so if you are over 50 this year you should be able to sock away $23K pre-tax in the k plan.

However, the 415c limit is prorated for short plans years so that my limit your contributions.

However, this is not tax advice; you should check with your plan administrator.
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Old 10-13-2016, 12:56 PM   #4
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Quote:
Originally Posted by Golden Mean View Post
My question is: Is there any provision in the IRA/401k rules that deal with a 401k that's started near end of the year? My issue is, I'm not sure I can deduct enough from my paycheck in the 8 weeks left in the year to match what I was putting in an IRA.

GM
Check your plan rules. Many plans allow you to contribute up to 90% of your gross (leaving necessary amounts for FICA taxes). ALso keep in mind any deductions for health insurance or other items. If you went full-tilt, you could divert nearly all of your paycheck to the 401k and get close, depending on your salary.
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Old 10-13-2016, 12:59 PM   #5
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Check your plan rules. Many plans allow you to contribute up to 90% of your gross (leaving necessary amounts for FICA taxes). ALso keep in mind any deductions for health insurance or other items. If you went full-tilt, you could divert nearly all of your paycheck to the 401k and get close, depending on your salary.
I'm pretty sure the 415c limit is prorated for short plan years. This may not be a short plan year though. Contributing more than the 415 limit can DQ the plan

again, OP needs to talk to the plan administrator and see how much can be deferred
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Old 10-13-2016, 01:52 PM   #6
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Employer is primarily responsible for enforcing/complying with 401k regulations. Having access to a 401k ( they will check a box on your W2) will effect your ability to deduct IRA contributions (based on income) regardless if you choose to participate in the 401k or not.

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Old 10-13-2016, 02:29 PM   #7
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If you contribute to the new 401k at any point during the year, you are considered to have access to an employer plan and the income limits for contributing to the IRA will be lower.

You can still contribute and get a tax deduction for the IRA contribution if your MAGI is less than $61,000 ($98,000 married). Note that MAGI is (for most people) essentially the bottom number on the first page of your 1040, so the 401k contribution will lower your MAGI and make it more likely for you to get under the limit.

The roth IRA income limits are higher ($117k single / $194k married) so if you are ineligible for a traditional tax deduction you could next consider a roth contribution.

If your income is still too high for those, then you are pretty much out of luck (some people may mention a backdoor roth contribution to you, but since you presumably have a bunch of money in traditional IRA account already this isn't very useful for you).

Edit to add: in your situation I would just increase my contribution to 80% of salary if possible to max out the 401k this year. You can change it again in January to be a more normalized contribution, but I personally just leave mine that high so that, in some future year if I leave my job mid-year, I will have already maxed out the 401k in the first quarter.
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Old 10-13-2016, 05:22 PM   #8
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Thanks for all the replies!

Yeap, it looks like if the emp plan is available anytime during the year, the IRA MAGI stuff kicks in.

I just got the 401k docs in the mail and it looks like I can actually do 100% of salary (which I'm not going to try), but I think I can make it work. I'll be without much income for a bit but I'll just end up digging into the money I would have put in the IRA.

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Old 10-13-2016, 05:59 PM   #9
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Also, be aware of limits that might be imposed as a result of being a "highly compensated employee". The definition for 2016 is $120k. I got dinged a couple of times and had my contributions limited when I worked for a smaller company.
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Old 10-13-2016, 06:19 PM   #10
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I once did 80% contribution, it was painful.

Be aware how your employer matches, as some are per paycheck, in which case you need to stretch out your contributions so you hit every pay period or you will miss some matching.
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Old 10-13-2016, 06:20 PM   #11
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Originally Posted by Droo View Post
If you contribute to the new 401k at any point during the year, you are considered to have access to an employer plan and the income limits for contributing to the IRA will be lower.

You can still contribute and get a tax deduction for the IRA contribution if your MAGI is less than $61,000 ($98,000 married). Note that MAGI is (for most people) essentially the bottom number on the first page of your 1040, so the 401k contribution will lower your MAGI and make it more likely for you to get under the limit.

The roth IRA income limits are higher ($117k single / $194k married) so if you are ineligible for a traditional tax deduction you could next consider a roth contribution.

If your income is still too high for those, then you are pretty much out of luck (some people may mention a backdoor roth contribution to you, but since you presumably have a bunch of money in traditional IRA account already this isn't very useful for you).

.......
+1
This is my understanding as well.
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Old 10-14-2016, 09:07 AM   #12
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I would be surprised if your employer allowed 100% of gross salary to be contributed. That would leave no leftover for payroll taxes (FICA /medicare) etc.

My Megacorp always limited us to 50%.

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Old 10-14-2016, 09:08 AM   #13
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I would be surprised if your employer allowed 100% of gross salary to be contributed. That would leave no leftover for payroll taxes (FICA /medicare) etc.

My Megacorp always limited us to 50%.

-gauss
I think FICA/FUTA are deducted before the deferral.
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Old 10-14-2016, 06:27 PM   #14
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I would be surprised if your employer allowed 100% of gross salary to be contributed. That would leave no leftover for payroll taxes (FICA /medicare) etc.

My Megacorp always limited us to 50%.

-gauss
Docs say 1% to 100%, but like I said, I'm not going to try it.
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Old 10-15-2016, 07:31 AM   #15
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I had your situation late 2015. I calculated what I needed to get all of the company match before year end. Since match yearly limit was low, I only needed 15%.
For 2016 I've stayed with 15%, which leaves me a bit short for the yearly upper limit for contribution.
I prefer Roth contribution in addition to 401k.
For spouse, there are limits on IRA deduction, so I wait until following year after tax prep, and put in only what is fully deductible as IRA, rest into Roth-IRA.
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