Anyone else bummed the 401K limit in 2008 didn't change?

[figner]

Do most others max out at $15.5K and then open some sort of IRA? Or just stop contributing and enjoy the "raise"?

IRA (possibly non-deductible due to having an employer retirement plan), Roth IRA, or taxable accounts are all reasonable options once the 401K is maxed out. I contribute to 401K, Roth, and then taxable. Just because it's not called a retirement account doesn't mean it can't be for retirement...

 

[Andre1969]

So your company stops your contributions when you hit the IRS limit? Mine doesn't, it just converts your contributions to be post-tax instead of pre-tax. I contributed about $22K last year to my 401K, about 7K over the limit. The company continues to do its match even after I hit the pre-tax limit.

Do most others max out at $15.5K and then open some sort of IRA? Or just stop contributing and enjoy the "raise"?

Yeah, my company simply stops my contributions when I hit the IRS limit. I don't know if I could get them to start doing post-tax or not. I do enough other investing on my own that I don't worry about it, though. I also have a Roth IRA that I try to max out every year, and also invest, post-tax, in mutual funds.

 

[boilerman]

Yeah, my company simply stops my contributions when I hit the IRS limit. I don't know if I could get them to start doing post-tax or not. I do enough other investing on my own that I don't worry about it, though. I also have a Roth IRA that I try to max out every year, and also invest, post-tax, in mutual funds.

I guess my company may be unusual in allowing post-tax contributions after you reach the IRS limit. I'm sure I would do better stopping with the max and investing the remainder elsewhere. But our combined income is almost $200K and I do have a pension so it seems that when I checked into the deductability of IRAs I never seem to qualify (has that changed?). And I just love the convenience of payroll deduction and having most of our funds in just a few places.

 

[meekie]

Very bummed. But it's going to motivate me more to get going on some taxable investments.
My company has a wacky match, but it's on a yearly basis, so I try to max out in early Dec. Makes it easy to budget for Xmas gifts.
My company will also let you put in up to 50% of your paycheck into the 401k, if it were 25% I probably couldn't hit it (except for the OT I put in last year).

 

[Ronstar]

I have to really investigate our company 401k. I get nailed by the "non-discrimination" clause since I'm more than a 5% owner, and the lower compensated workers put in little or no dollars in their 401k's. According to our 401k people, I can only invest about 10k.

 

[Outtahere]

I have to really investigate our company 401k. I get nailed by the "non-discrimination" clause since I'm more than a 5% owner, and the lower compensated workers put in little or no dollars in their 401k's. According to our 401k people, I can only invest about 10k.

I get hit with that too, the catch up clause helped once I hit 50 but I still can't put in max.

 

[Sarah in SC]

Ronstar, look at what is called a "safe harbor" plan. It would likely be worth your trouble to consult with an actuary about your specific situation and also to see if a defined benefit plan would be better for you.

The safe harbor 401k profit sharing plans will allow great contributions because of the compulsory safe harbor company match to eligible employees.

We stretch our contributions over the entire year, as the match is per pay period, so there is no reason to max out early. DHs plan would allow it, but our cash flow would suffer mightily, and make it harder to fund the Roths and the taxable savings early.

 

[Ronstar]

Ronstar, look at what is called a "safe harbor" plan.

We have looked at one. I didn't look at the plan, but I was told that the company owners would not benefit to the extent of the cost of implementing it. There really isn't much of a push to get one since the owners that did review the safe harbor option are under 50 and don't max out anyway.

I found that a "catch-up" contribution can be made after hitting the test limit. So i questioned our 401k consultant and she said that's true, but we are instead using the unused 5k catch-up contributions as a credit against our test limit. i still think I'm getting shafted here somehow.

 

[Outtahere]

That's right Ronstar, it's very expensive to have a safe harbor plan, we checked it out and decided against it.

 

[StJohnsWood]

I don't get it. They want us to save more and save for retirement but then cap the 401K. They'll get their money.

I would like to see it unlimited. You can put as much as you want in the 401K. As long as it comes from your job let us max that baby out!!

 

[BunsGettingFirm]

I was always confused as to why there are limits on these accounts in the first place. Rich people are not going to use 401ks to save for their retirement and most people cannot afford to put in the max a year anyway, regardless of what it is.

I'll never use one since my company forces me to invest in "something". Why can't it be an high interest bearing account instead of gambling it away in the stock market?

That's exactly the point. Warren Buffet once quipped, "I have a lower tax rate than my $60k/year secretary does." The government doesn't want a bunch rich people paying only 15% capital gains tax, so they do everything to keep you an employee and paying the higher tax rates on labor.

 

[svt2nv04]

uhhh being that this is an early retirement forum, is there a specific reason that i don't know about that you guys would want to put in as much as possible in a 401k? i am trying to retire by 50 but i only contribute 12.5% to my 401k so that i'll have enough to contribute to a roth ira and a taxable account. a 401k and roth ira you have to be a certain age to withdraw without penalty correct? so why other than tax benefits would you want to max out a 401k?

i mean, unless you guys are maxing it out PLUS contributing (maxing) roth ira and a taxable account.

 

[Niko]

uhhh being that this is an early retirement forum, is there a specific reason that i don't know about that you guys would want to put in as much as possible in a 401k? i am trying to retire by 50 but i only contribute 12.5% to my 401k so that i'll have enough to contribute to a roth ira and a taxable account. a 401k and roth ira you have to be a certain age to withdraw without penalty correct? so why other than tax benefits would you want to max out a 401k?

i mean, unless you guys are maxing it out PLUS contributing (maxing) roth ira and a taxable account.

72t.

 

[svt2nv04]

i thought that was just for a roth ira?

 

[Niko]

i thought that was just for a roth ira?

If that's true (I really don't know) then rollover to a roth.

Most folks here also have other, non tax advantaged, accounts to draw on.

 

[svt2nv04]

If that's true (I really don't know) then rollover to a roth.

Most folks here also have other, non tax advantaged, accounts to draw on.

yeah that's true about the rollover. are there any disadvantages to doing so? I'm surprised the IRS hasn't made it a rule that we're not allowed to do that. I guess you get taxed when you roll it over. There isn't a penalty is there?

 

[Niko]

yeah that's true about the rollover. are there any disadvantages to doing so? I'm surprised the IRS hasn't made it a rule that we're not allowed to do that. I guess you get taxed when you roll it over. There isn't a penalty is there?

I've never done a roll over so you might wait for a more informed response. But the main disadvantage, as I understand it, is the need to pay a potentially big tax bill when you roll over. As such, it makes sense to plan your roll over a couple of years in advance to ensure you can pay the taxes.

 

[growing_older]

Or spread it out over several years. Rollover just enough each year to stay in lower brackets.

 

[Niko]

Or spread it out over several years. Rollover just enough each year to stay in lower brackets.

Good point.

 

[Gsquared]

I guess my company may be unusual in allowing post-tax contributions after you reach the IRS limit. I'm sure I would do better stopping with the max and investing the remainder elsewhere. But our combined income is almost $200K and I do have a pension so it seems that when I checked into the deductability of IRAs I never seem to qualify (has that changed?). And I just love the convenience of payroll deduction and having most of our funds in just a few places.

I don't think it is unusual for a company to allow after-tax contributions. In my company you can choose the percentage that you want to go to pre-tax and to after-tax, so theoretically you could put in only after-tax (although I don't know why you would want to do that). In addition to the IRS pre-tax limit, there is an overall limit on the combined contribution. I have typically maxed out the pre-tax, and put as much into after-tax as possible. Earnings on the after-tax grow tax free just as with a non-deductible IRA.

I think it is unusual for your company to match after-tax. This in and of itself is a reason for you to use the 401K for these savings - take the free money!

Fellow Boilermaker,
Gsquared

 

[NinjaPigeon]

That's right Ronstar, it's very expensive to have a safe harbor plan, we checked it out and decided against it.

Sorry for being late to the party, but are you saying it's more expensive due to the way the match works versus a normal 401k?

We do safe harbor to get around the 401k qualification tests, but our cost for the plan is basically the same. Plus, due to the nature of our employees, they'd still capture the match if it was a normal plan. Of course, we are a small company, so it's easy math for us I'd imagine a company of a hundred plus people might make that more challenging.

 

[Sarah in SC]

Ninja, I don't know about the costs relative to other kinds of 401ks, but the Safe harbor is practically the only way that the HCEs and executives of a company can put the full amount in the plan and not run afoul of one or more of the tests.

We have a safe harbor plan that we run for just a handful of clients, but the admin is done by a TPA firm.

 

[Ronstar]

Sorry for being late to the party, but are you saying it's more expensive due to the way the match works versus a normal 401k?

We do safe harbor to get around the 401k qualification tests, but our cost for the plan is basically the same. Plus, due to the nature of our employees, they'd still capture the match if it was a normal plan. Of course, we are a small company, so it's easy math for us I'd imagine a company of a hundred plus people might make that more challenging.

Yes, I remember the safe harbor could include an increased match at the lower pct contributions, and also a change in vesting terms. The safe harbor requires better plan terms for lower paid employees in exchange for giving the highly compensated freedom from discrimination testing, and therefor allowing the highly compensated to max out their contributions. In our case, the owners' costs of giving most employees an increased match was more than the benefit the owners would receive from maxing out.

 

[NinjaPigeon]

Yes, I remember the safe harbor could include an increased match at the lower pct contributions, and also a change in vesting terms. The safe harbor requires better plan terms for lower paid employees in exchange for giving the highly compensated freedom from discrimination testing, and therefor allowing the highly compensated to max out their contributions. In our case, the owners' costs of giving most employees an increased match was more than the benefit the owners would receive from maxing out.

How much match were you giving? The terms of Safe Harbor are 3% non-elective (matching even if they contribute nothing) or 4% elective (only match what they contribute, up to 4%).

Almost everywhere I've worked has had a 401k match as generous or moreso than this.

In our case, we have it because of me I'm not HCE, but am most likely to hit it of all the employees since I was hired first. I knew it would be in my best interests to keep those pesky compliance rules on the sideline if possible.

 

[armor99]

I was always confused as to why there are limits on these accounts in the first place. Rich people are not going to use 401ks to save for their retirement and most people cannot afford to put in the max a year anyway, regardless of what it is.

I'll never use one since my company forces me to invest in "something". Why can't it be an high interest bearing account instead of gambling it away in the stock market?

First off "rich people" did not get rich by being foolish. If you can put money into a tax deferred account, you most certainly will. Plus the fact that if you invest correctly, there is no reason that future generations of thir family ever need to be poor again.

Be careful about how you think about the stock market.... you need to think of investing in the long term say 20-30 years. Investing in the stock market in the short term (a year or less) certainly IS gambling. But continually putting money in and deversifying is not. I have seen members of my own family take the same line of reasoning that you have. And in their case, they have litterally "conservatived" themselves right into the poorhouse for retirement. If all you do is put money in the bank or bonds, then you will never be able to achieve a desireable retirement. It just is not going to happen, the interest you earn is just too small and inflation is always eating away at what you are trying to save.
You can beleive what I am telling you or not as you prefer, but if you look at the return on investments for any 30 year period, nothing has beaten the stock market.. During shorter runs 5,10,15 years... real estate, or gold, or other investments might have done better. But for the 30 year model.... the market is still king...