contributing over the 401k limit

[ER_Hopeful]

I increased my 401k contribution % earlier this year. At this rate, my contribution amount would have gone over the limit ($17500) at year end. would I face some kind of penalty or any ill consequences?

Also does $17500 only apply to my contribution or my employer match as well?

 

[sengsational]

In my experience, the payroll department just stopped when they hit the limit, so zero consequences, but I'd call your payroll department and make sure. I think there are people here that set their percentage real high and got all the money into the 401k early in the year.

The limit is the money you contribute. The match is not added-in.

 

[Jackanory]

You may find you don't get your complete match %. Your payroll department might only do the match in months that you contribute. For those months later in the year, when you make no contribution, they may not make a match. For those early months, where you do make a contribution, they'll only match up to the specified percentage. Where possible, spread your contributions throughout the year!

 

[sengsational]

...
Your payroll department might only do the match in months that you contribute.
...

Another question to ask when you call payroll.

 

[jim584672]

Where I worked any amount over 17,500 goes to 401k after-tax automatically. A new IRS ruling says that after-tax 401k money can be rolled into a Roth IRA. So max out the before-tax amount, continue with the after-tax once the 17.5k is reached. Then when you leave the company roll everything out to IRAs.

 

[zesty]

So max out the before-tax amount, continue with the after-tax once the 17.5k is reached. Then when you leave the company roll everything out to IRAs.

Or if you work at a company that allows in-service non-hardship withdrawals of the isolated after-tax 401k contributions, roll the after-tax over once or twice a year to a Roth IRA.

Not all plans allow this, but I checked and it turns out mine does. Allows me to put up to $30k per year in a Roth IRA as opposed to just $5.5k.

A good discussion is available at Bogleheads - The Mega Backdoor Roth IRA

 

[pb4uski]

I increased my 401k contribution % earlier this year. At this rate, my contribution amount would have gone over the limit ($17500) at year end. would I face some kind of penalty or any ill consequences?

Also does $17500 only apply to my contribution or my employer match as well?

The limit applies only to your contributions, not to the match.

Where I worked the match only applied for pay periods where you were contributing so one had to stretch contributions out over the entire year to optimize the match. If you did go over, there was an election you made when you signed up where they would either stop withholding or continue withholding but on a post-tax basis. So our 401k had two separate pools - pre-tax balances and post-tax balances.

After I retired I learned that I could roll my post-tax 401k balance into a Roth IRA. If I had know that I would likely have saved a lot more post tax while I was working.

 

[ProspectiveBum]

Does anyone know if there's a reason for an employer to limit after-tax contributions? I'm not eligible to contribute to a Roth, so this would be a great way to build up some after-tax savings. My company offers a traditional and a Roth 401k, but caps contributions to both at $17.5k.

 

[bad_LNIP]

At this rate, my contribution amount would have gone over the limit ($17500) at year end. would I face some kind of penalty or any ill consequences?

I'm not eligible to contribute to a Roth, so this would be a great way to build up some after-tax savings.

If you guys are trying to load up your tax advantaged accounts, there are easier ways to do it. For example, setting up a self-directed IRA with prosper/Lending club and lending money to a non-prohibited friendly party at a high interest rate.

 

[2035]

I increased my 401k contribution % earlier this year. At this rate, my contribution amount would have gone over the limit ($17500) at year end. would I face some kind of penalty or any ill consequences?

Also does $17500 only apply to my contribution or my employer match as well?

1. I play around with my contribution rates to get within a couple hundred of the yearly max. For example, one year I contributed 23% until my raise kicked in in March, then decreased my contribution to 22%....and up again for the last month.

2. Employer matches don't count. That's on top of what you can put in.


Sent from my iPhone using Early Retirement Forum

 

[LOL!]

Does anyone know if there's a reason for an employer to limit after-tax contributions? I'm not eligible to contribute to a Roth, so this would be a great way to build up some after-tax savings. My company offers a traditional and a Roth 401k, but caps contributions to both at $17.5k.

Sure, generally only the highly compensated folks can afford to contribute the max to their 401(k) and if they were allowed to contribute even more, then the plan would not be fair to the working stiffs in a company. It would look like a scheme to enrich the portfolios of the wealthy, highly paid workers and demoralize the rest of us.

Although you write you are not eligible to contribute to a Roth IRA, I think you probably are eligible to do the so-called "back door Roth IRA" where you contribute after-tax to a non-deductible traditional IRA and then convert that immediately to a Roth IRA. Current traditional IRAs can interfere with this, so read up about it.

 

[jim584672]

Just wanted to add the 401k before, 401k after, 410k Roth, and company match can't exceed $52,000 (2014) or $53,000 (2015).

 

[RetireBy90]

Sure, generally only the highly compensated folks can afford to contribute the max to their 401(k) and if they were allowed to contribute even more, then the plan would not be fair to the working stiffs in a company. It would look like a scheme to enrich the portfolios of the wealthy, highly paid workers and demoralize the rest of us.

I used to work at a small company, a couple hundred employees, and as a member of management, was limited to how much we could contribute as "highly compensated" employees. Every year around this time HR would contact us if we were contributing too much to the 401k. If I remember correctly it was a percentage like 150% of the average contribution.

Then I was recruited by a mega corp where they paid me about the same to be a techie and since I was tired of management headaches took that job. At that job now 12 years, and I've never heard from HR here despite a 50% raise in my contributions. Any excess over $22,500 (since over 50) goes into after tax contributions. Mega corp does only match for the period you contribute, so if you don't do at least 6% each period you loose a match. However, they match 1 for 1 for first 6%, so if you do 4% they also do 4%, and if you do 7% they match with 6%.

 

[LOL!]

If it has already come out in this thread, I still want to say this:

Generally, contributing after-tax to a traditional 401(k) is a very bad idea … unless the contribution can be nearly immediately put into a Roth. The reason is that gains in a traditional 401(k) are taxed at one's ordinary income tax rate upon withdrawal instead of at the more favorable tax rates of both a Roth (no taxes on gains) and a taxable account (long-term capital gains tax rate is as low as 0%, but always lower than one's marginal income tax rate).

So if one cannot rollover or transfer their after-tax traditional 401(k) contributions right away, then investing tax-efficiently in a taxable account will be better. Of course, a Roth IRA beats out even that.

Otherwise, contributing after-tax to a traditional 401(k) is one of the worst things one can do tax-wise.

 

[pb4uski]

I don't even understand how one could contribute after-tax to a traditional 401k.

Where I worked post-tax contributions to the 401k were separate from pre-tax contributions - sort of like two separate 401ks. Your pre-tax 401k balance could be rolled into a tIRA and your post-tax 401k balance could be rolled into a Roth IRA.

 

[RetireBy90]

If it has already come out in this thread, I still want to say this:

Generally, contributing after-tax to a traditional 401(k) is a very bad idea … unless the contribution can be nearly immediately put into a Roth. The reason is that gains in a traditional 401(k) are taxed at one's ordinary income tax rate upon withdrawal instead of at the more favorable tax rates of both a Roth (no taxes on gains) and a taxable account (long-term capital gains tax rate is as low as 0%, but always lower than one's marginal income tax rate).

So if one cannot rollover or transfer their after-tax traditional 401(k) contributions right away, then investing tax-efficiently in a taxable account will be better. Of course, a Roth IRA beats out even that.

Otherwise, contributing after-tax to a traditional 401(k) is one of the worst things one can do tax-wise.

I do it with a couple stipulations 1) I only do a small amount like 1 or 2 additional percentage of my income; and 2) All my contributions are directed to my Roth 401K.

And for a couple reasons:
1) I know myself, and if I can get funds deducted from my check, I leave them alone while my take home pay very seldom makes it to the savings/IRA accounts. After 45 years of trying to change my actions, I know that I am better off having it deducted when I can.

and 2) I have all my 401K (except for match) going into a Roth 401K. I'm thinking, perhaps wrongly, that once in a Roth I can convert to Roth IRA when I leave. LOL! Before your post it never occurred to me that I may have to pay taxes these funds again. Any insight on excess contributions to Roth 401K

Thanks

 

[Senator]

My contribution rate is 75% at my employer. I generally max out the $17,500 + the $5,500 by the end of February, or the end of March if bonuses are a bit light.

The employer will stop deducting any amounts from your check as soon as you hit the max. There should be no danger of over contributing. In 2015, the limit increases to $18,000 + $6,000.

My employer matches the 401K only once a year, in January the year after. So there is no danger (to me) of missing any matching contributions (4%).

I do recall that the first year, they only matched accounts that had a contribution on 12/31. Probably a system limitation with the assumption that no one will ever max out a 401K account before the end of the year.

 

[RetireBy90]

The employer will stop deducting any amounts from your check as soon as you hit the max. There should be no danger of over contributing. In 2015, the limit increases to $18,000 + $6,000.

As I mentioned above, This seems to be a plan specific option. I used to mull over the contribution from each check at the end of the year trying to get as close to the limit as possible without going over. My plan would chop you off like you mention. Then a couple years ago, I was on target to over contribute about $50 with the last Dec paycheck, so I figured they would just chop it and do my 15% minus the $50, but they put the $50 into after tax part of my 401K. Since then, I haven't worried about going over, just about getting enough in to hit the max. Thinking now, it seems to have happened about the same time they started offering the Roth 401K. Not sure if the 2 are related but it seems to be about the same time.

 

[Senator]

As I mentioned above, This seems to be a plan specific option.

By law, the max is the max. $23,500 for 2014. For all 401Ks and Roth 401Ks. We have a Roth 401K option too, but the max doesn't change.

I did read this article, and you may have a good thing going. Your after tax 401K might be able to be rolled over into a Roth IRA.

 

[gauss]

I don't even understand how one could contribute after-tax to a traditional 401k.

The plan administrator typically has separate accounting for the pre-tax and after-tax 401k contributions.

The results are all reported on a single quarterly statement, but the accounts are tracked and displayed as separate line items.

-gauss

 

[RetireBy90]

By law, the max is the max. $23,500 for 2014. For all 401Ks and Roth 401Ks. We have a Roth 401K option too, but the max doesn't change.

I did read this article, and you may have a good thing going. Your after tax 401K might be able to be rolled over into a Roth IRA.

If I read the article correctly, it talks of contributing after you hit the $23K limit

In fact, it appears that the new IRS rules are so open in this regard, that they not only permit the free conversion of after-tax 401(k) contributions into a subsequent Roth IRA, but the availability of this conversion makes it more appealing than ever to make after-tax contributions into a 401(k) plan in the first place (at least after first obtaining the employer 401(k) match and maxxing out available pre-tax or Roth contribution limits). Will the new rules lead to a resurgence of higher-income individuals making after-tax contributions to a 401(k) plan, after maxxing out available alternatives, for the sole purpose of preparing to complete a future tax-free Roth conversion of the contributions down the road?

If I remember correctly, isn't there another limit of like $52K for 401K? Anyone know where this comes in or if I'm just ?

 

[gauss]

If I read the article correctly, it talks of contributing after you hit the $23K limit



If I remember correctly, isn't there another limit of like $52K for 401K? Anyone know where this comes in or if I'm just ?

You are referring to the Defined Contribution aka Section 415(c)(1)(A) limit.

For 2015 it has been increased to $53,000. In the case of my DW, the following components go into this limit.

- 401k - pre-tax employee contributions
- 401k - after-tax employee contributions
- company matching contributions
- employee DB pension contributions

I would suspect that Roth 401k employee contributions would also be included in the limit.

We have it setup to request the maximum percentage allowed by the company to be deducted. On every paystub it shows that the contributions were limited by law to be $xyz.ab in order to respect the $53,000 annual limit.

-gauss

 

[RetireBy90]

from IRS at 401(k) Plans - Deferrals and matching when compensation exceeds the annual limit

Compensation and contribution limits are subject to annual cost-of-living adjustments. The annual limits are:
•salary deferrals - $17,500 in 2014 and $18,000 in 2015, plus $5,500 in 2014 and $6,000 in 2015 if the employee is age 50 or older (IRC Sections 402(g) and 414(v))
•annual compensation - $260,000 in 2014 and $265,000 in 2015 (IRC Section 401(a)(17))
•total employee and employer contributions (including forfeitures) - the lesser of 100% of an employee’s compensation or $52,000 for 2014 and $53,000 for 2015 (not including "catch-up" elective deferrals of $5,500 in 2014 and $6,000 in 2015 for employees age 50 or older) (IRC section 415(c))

The after browsing IRS site, I found a description of contributions at: Retirement Topics - Contributions

Types of employee contributions
•Salary reduction/ elective deferral contributions are pre-tax employee contributions that are a generally a percentage of the employee's compensation. Some plans permit the employee to contribute a specific dollar amount each pay period. 401(k), 403(b) or SIMPLE IRA plans may permit elective deferral contributions.

•Designated Roth contributions are a type of elective contribution that, unlike pre-tax elective contributions, are currently includible in gross income but tax-free when distributed. 401(k), 403(b) and governmental 457(b) plans can allow them. If a plan permits designated Roth contributions, it must also offer pre-tax elective deferral contributions.

•After-tax contributions are contributions from compensation (other than Roth contributions) that an employee must include in income on his or her tax return. If a plan allows after-tax contributions, they are not excluded from income and an employee cannot deduct them on his or her tax return.

•Catch-up contributions If permitted by a 401(k), 403(b), governmental 457(b), SARSEP or SIMPLE IRA plan, participants who are age 50 or over at the end of the calendar year can also make catch-up elective deferral contributions beyond the basic limit on elective deferrals.

Now put on your accountant hat and your IRS hat on top of that, I CAN read this to say that after-tax contributions are different than the deferral contributions. Note that in first quote, it describes limits on deferrals. So you could consider the 2 quotes above to say that you have only 23K you can defer, or postpone taxes on, and then another pool with max employer and employee contributions limited to $52K ( I read on IRS site somewhere between the 2 above).

Interesting option. I could do another $2K per month and use that as a big part of my living expenses for first couple years.

 

[Lakewood90712]

I ran into this situation twice with a 457 plan (one of the gov. employee versions of a 401k). Generally same rules as a 401k or 403b plan. Was putting 2k per pay period starting Jan. of each year. Payroll took out too much at this rate and exceeded. The plan administrator caught the mistake, and sent me a check for the excess. Payroll refused to adjust the amount, so I had to declare the amount as income on Fed and State tax returns. A PITA.