Undeliberate 403b overcontribution

[MelWel]

I thought I was going to quit my job. I receive pay from 2 different employers. I aggressively accelerated my contributions to my 403bs to both employers in an attempt to get to $15,500 in 6 months. I did that but did not quit. In order to continue receiving matching funds (5%) from my employers, I continued contributing 5% of my salary to my 403b but on a post-tax basis.

As I read this forum, I am wondering if this was a bad idea. I have until April 15th to apply get my "overcontributions" back. But I will lose the matching funds if I do that.

Can anyone help me with the math/issues here? I am in a high tax bracket now and I am 36 - possibly expect to be in a lower one when I retire. The account I can access/get a refund from has about $4600 of which $600 was from matching. So if I request a refund I will get $4000. Of which about 95% will be taxed as income and about 5% as an investment.

Does enyone think the post tax 403b contributions will be such a hastle to deal with when I retire that it is not worth thinking about? That I should just ask for the money back and forget about the math.

I have also considered quiting my job in 2009 and rolling all of my retirement accounts into an IRA and then converting them to a Roth IRA in 2010 when the tax code will allow for that (i.e. people in any income bracket to convert to a Roth). Or maybe just roll the overcontribution into an IRA and then Roth? Maybe that is a possibility?

Maybe as someone said I should just be focusing on returns instead of tax savings issues.

 

[DblDoc]

Hopefully someone smarter then me can help you with the math part. In terms of your last statement your returns will depend very much on how well you address the tax savings issue...

DD

 

[MelWel]

Thanks for the response. I thought about this more last night. As I see it - my current tax bracket is not relevant with regard to this situation.

Whether I contribute $4000 to a post-tax 403b or whether I don't contribute $4000 to a post-tax 403b does not matter. I both cases I have to pay income tax for 2007 on the $4000.

I guess the bottom line issue is the loss of the $600 matching. Since 600/4000 is 15% - in effect I have earned a 15% return for the 2007 year if I leave the money in the account. If I leave it in, in 30 years or so I will have to pay income tax on the $4000 again plus income tax on the $600. I assume that will be at least 25%. So that will be $1150 ($4600 x .25). But the $4600 will be earning comounded interest over the 30 years (this interest will be taxed as income when I withdraw it correct?).

If I take it out, I loose the $600. But if I stick the $4000 in a non-tax deferred account I will have to pay only capital gains tax yearly on the interest I earn. Which is 25% I think?

In first scenario I have the benefit of compounded interest and an extra 15% now but pay a chunk of taxes again on my initial contributiuon + my match in 30 years vs. the second scenario I don't pay a second income tax but am paying YEARLY capital gains which slightly eats away at the interest earned and I loose this inital 15% gain which also would have been capitalizing.

I do reasearch in preventive medicine and the same types of questions come up - fundamentally it is tough to predict 30 years into the future.