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Catch Up Contributions and 401k Contribution Limits
Old 05-13-2015, 08:59 AM   #1
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Catch Up Contributions and 401k Contribution Limits

DW is turning 50 this year and thus eligible for "catch-up" contributions in her 401k.

What is clear to me is that the catch-up contribution of up to $6,000 will be available to her in addition to the normal elective deferral limit of $18,000 for a total of $24,000 pre-tax.

In addition she makes use of her plan's provision to allow after-tax (non-Roth) contributions up to the legal limit.

My question is whether or not the defined contribution limit,415(c)(1)(A), of $53,000 is affected by her attaining age 50?

That is to say which of the following two statements, if any is correct:

#1) The total of all employer/employee contributions must be not greater than $53,000.

or

#2) The total of all employer/employee contributions must be not greater than $59,000.


I suspect that we are not the first one to struggle with this question.

Thanks
-gauss
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Old 05-13-2015, 09:04 AM   #2
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2, definitely - assuming she uses the full catch up

if she doesn't use any catch up, 1 is correct

basically the catch up is a "freebie" that doesn't affect nondiscrim testing or the statutory deferral limits
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Old 05-13-2015, 09:04 AM   #3
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Quote:
Originally Posted by gauss View Post
My question is whether or not the defined contribution limit,415(c)(1)(A), of $53,000 is effected by her attaining age 50?

That is to say which of the following two statements, if any is correct:

#1) The total of all employer/employee contributions must be not greater than $53,000.

or

#2) The total of all employer/employee contributions must be not greater than $59,000.
#2 is correct assuming she contributes the full $6,000 as the catch up. Her employer can't use that room for profit sharing.
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Old 05-13-2015, 09:52 AM   #4
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#HappyDance!

Thanks folks for the prompt responses and for making my day. From all the written documentation (IRS, legal, etc). I thought that #1 was the correct answer.

We will go ahead and update DW's 401k percentages to take advantage of the pre-tax catch-up feature and hopefully her after-tax contributions will not be reduced from their current levels.

With the added funds going into pre-tax, I will plan to make an offsetting Roth conversion from our traditional IRAs as I am interested in lower the pre-tax fund levels as much as possible during the next 20 years before RMDs and SS kick in.

Alas we will likely never be in the 15% marginal tax bracket (with pension available to start at age 52 for DW and plenty of pre-tax $ to convet), but hey that's a first-world problem that is good to have!

-gauss
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Old 05-13-2015, 10:07 AM   #5
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I front load my catch up (i.e. it's not ratable)


and you can start the beginning of the plan year you turn 50, not the date you turn 50
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Old 05-13-2015, 10:11 AM   #6
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The way I understand it her limit will be 53k a year. That is 24k before taxes plus match plus XYZ after taxes where total combined together is 53k.

I don't see any documentation which states that Maximum total contribution is different for people under 50 versus over 50........

But I must be wrong looking at postings above.
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Old 05-13-2015, 10:14 AM   #7
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The way I understand it her limit will be 53k a year.

I don't see any documentation which states that Maximum total contribution is different for people under 50 versus over 50........

But I must be wrong looking at postings above.
And that is always how I have read it also, but given the responses I will adjust the percentages and hopefully the after tax contributions will not be reduced.

The employer is responsible for keeping the employee below the level so we have always given the maximum percentage allowed in the web form and then the amount contributed after-tax would be reduced every pay period, by law, and the amount of the reduction would be printed on the paycheck stub.

It would be nice if we could find something in writing that justifies answer #2 but now that I believe that is the correct answer, I will read all the documentation with that in mind.

-gauss
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Old 05-13-2015, 10:17 AM   #8
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And that is always how I have read it also, but given the responses I will adjust the percentages and hopefully the after tax contributions will not be reduced.

The employer is responsible for keeping the employee below the level so we have always given the maximum percentage allowed in the web form and then the amount contributed after-tax would be reduced every pay period, by law, and the amount of the reduction would be printed on the paycheck stub.

It would be nice if we could find something in writing that justifies answer #2 but now that I believe that is the correct answer, I will read all the documentation with that in mind.

-gauss
Yea you just have to be careful about company match....

You don't want your extra contribution result in lower company match, because you got to limit of 53k by June

Some companies have "True Match" where in such case you will get extra match following year.
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Old 05-13-2015, 10:19 AM   #9
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It would be nice if we could find something in writing that justifies answer #2 but now that I believe that is the correct answer, I will read all the documentation with that in mind.

-gauss
Number 2 is wrong IMO
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Old 05-13-2015, 10:34 AM   #10
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It would be nice if we could find something in writing that justifies answer #2 but now that I believe that is the correct answer, I will read all the documentation with that in mind.

-gauss
I'll dig something up in a jiffy
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Old 05-13-2015, 10:37 AM   #11
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see 4.72.7.3


Internal Revenue Manual - 4.72.7 Examination Guidelines for IRC 415(c)
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Old 05-13-2015, 10:43 AM   #12
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I love this place! Thanks Big Hitter.

-gauss
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Old 05-13-2015, 10:44 AM   #13
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UR welcome


I'll stick around if I can stay out of trouble with the admins


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Old 05-13-2015, 10:50 AM   #14
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To add to Big_Hitter's response....

The IRS, when announcing the final regulations governing these type of contributions, stated as follows:

Quote:
Under these final regulations (including changes from the proposed regulations to reflect the provisions of JCWAA), catch-up contributions are not taken into account in applying the limits of section 401(a)(30), 402(h), 403(b), 408, 415(c), or 457(b)(2) (determined without regard to section 457(b)(3)) to other contributions or benefits under the plan offering catch-up contributions or under any other plan of the employer
Internal Revenue Bulletin - September 15, 2003 - T.D. 9072

ETA: Is immediately under "C. Treatment of Catch-up Contributions"
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Old 05-13-2015, 10:59 AM   #15
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yes so they are a total "freebie"
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Old 05-13-2015, 11:04 AM   #16
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And here it is also shown under the current Code of Federal Regulations as published by Cornell.

26 CFR 1.415(c)-1 - Limitations for defined contribution plans.

Quote:
(B) Catch-up contributions. A catch-up contribution made in accordance with section 414(v) and § 1.414(v)-1 does not give rise to an annual addition.
Thanks for the reference.

-gauss
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Old 05-13-2015, 12:10 PM   #17
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OK I was wrong....glad to learn something.
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Old 05-13-2015, 01:45 PM   #18
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OK I was wrong....glad to learn something.
Asking critical questions around here is key to getting to the truth via a good discussion of the issues.

If you had not thrown in a bit of doubt I may not have initiated the search for the written references.

Thank you, indeed, for your constructive comments.

-gauss
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Old 05-13-2015, 01:49 PM   #19
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I front load my catch up (i.e. it's not ratable)


and you can start the beginning of the plan year you turn 50, not the date you turn 50
Are you suggesting that the following scenario would be allowed under your plan:

First Contribute $6,000 to pre-tax catch-up contributions
Then Contribute $53,000 to after-tax (non-roth) contributions

I was under the impression that DW could not make catch-up contributions until her elective deferral (ie $18,000 pre-tax) has been maxed out.

-gauss
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Old 05-13-2015, 02:06 PM   #20
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Are you suggesting that the following scenario would be allowed under your plan:

First Contribute $6,000 to pre-tax catch-up contributions
Then Contribute $53,000 to after-tax (non-roth) contributions

I was under the impression that DW could not make catch-up contributions until her elective deferral (ie $18,000 pre-tax) has been maxed out.

-gauss
Money is fungible, and based upon the plans I'm familiar with, the plan will not segregate the catch-up amount; it will all be "employee contributions." Just have DW divert all of her pay until 6K is invested, then prorate the remaining employee contributions. (Or, if she'd like, you could front load all of the employee side, including the 6K.)

OH--and agree 100% with your comment to eta2020; we all benefit from critical questions. Best way to learn.
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