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Author: willycapt Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25242  
Subject: 401K contribution limit question Date: 11/30/2004 10:21 PM
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Hello ...

The limit for 2005 is $14,000. Does that mean that my individual contributions cannot exceed $14k, or, does that mean that my contribution + my employer match contributions cannot exceed $14k?

Thanks.
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Author: Minxie Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18119 of 25242
Subject: Re: 401K contribution limit question Date: 11/30/2004 10:36 PM
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The limit for 2005 is $14,000. Does that mean that my individual contributions cannot exceed $14k, or, does that mean that my contribution + my employer match contributions cannot exceed $14k?

Your individual contributions cannot exceed $14,000.

Minxie

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18120 of 25242
Subject: Re: 401K contribution limit question Date: 11/30/2004 11:19 PM
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By the way, that $14K limit is the pretax limit. The total of pretax and after tax contributions has a separate higher limit, often 15 to 25% of gross pay.

But if you are classified as a highly compensated employee--usually management--there is a third limit--usually lower--based on the amount contributed by all of the non-highly compensated employees. Its intended to keep participation in the plan more or less balanced. Its an incentive for management to encourage everyone to contribute to the plan.

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Author: Minxie Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18121 of 25242
Subject: Re: 401K contribution limit question Date: 11/30/2004 11:35 PM
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By the way, that $14K limit is the pretax limit. The total of pretax and after tax contributions has a separate higher limit, often 15 to 25% of gross pay.

"After-tax" contributions would usually apply to someone who has taken a loan from their 401K, right? Other than that, what "after-tax" contributions would you have?

Minxie


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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18122 of 25242
Subject: Re: 401K contribution limit question Date: 11/30/2004 11:42 PM
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Nearly all 401K plans allow you to make a combination of before tax and after tax contributions. The pretax contributions give you the best deal for retirement. So you want to max that first. But the after tax contributions still grow tax free until retirement. So if you can afford it, maxing the whole plan including aftertax is a good deal.

No after tax contributions have nothing to do with loan repayments.

The usual order of preference if funds are limited is: 401K pretax to get employers match; Roth IRA to the max; then 401K to the full contribution max.

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Author: Minxie Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18123 of 25242
Subject: Re: 401K contribution limit question Date: 11/30/2004 11:57 PM
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I did not know that. I thought you would only contribute pre-tax dollars to your plan. Obviously, then, I would not even know how to contribute after-tax dollars. Or why you would? Is that for people whose plan does not allow them to contribute to the limit? That is to say, those who are capped at a % of their salary?



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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18124 of 25242
Subject: Re: 401K contribution limit question Date: 12/1/2004 12:03 AM
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The law is the law. I'm not sure what our Congress had in mind when they did it that way.

The after tax money is a little easier to get your hands on. So some people do after tax if they think they might need the money later for some reason prior to retirement like a downpayment on a house, etc. But pretax is the better plan as far as it goes. Do both to the total plan max if you can afford it.

Most plans I have been in send you a form at least once a year to fill out asking how much you want to contribute, usually as a percentage of gross pay, and then how much pretax and how much aftertax. Usually the fine print explains what the limits are for your plan.

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Author: Minxie Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18126 of 25242
Subject: Re: 401K contribution limit question Date: 12/1/2004 12:09 AM
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Most plans I have been in send you a form at least once a year to fill out asking how much you want to contribute, usually as a percentage of gross pay, and then how much pretax and how much aftertax. Usually the fine print explains what the limits are for your plan.

It's interesting to me 'cause I had never heard of contributing after tax income. Our plan allows us to contribute up to 100% of our compensation so I set my % as high as I could afford and adjust it periodically. I've never seen one of these forms but that could be because we can go online and adjust our contribution % at any time.

Thanks for explaining.

Minxie

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Author: willycapt Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18127 of 25242
Subject: Re: 401K contribution limit question Date: 12/1/2004 1:39 PM
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Thank you all for the replies ... although, I have a another simple question.

I can afford, and plan to contribute, the max of $14k to my 401k in calendar year 2005. Pretty simple, just figure out what percentage of my salary I need to deduct to get me to $14k for the year. Now, my company will make matching contributions (I forget the exact details, but it's more-or-less the standard).

OK ... here is my question. Is there anything related to that corporate matching contribution that may make me want to reduce my % contribution as to take advantage of something related to the matching process? I just want to make sure I'm maximizing my company's match and want to know if my contribution percentage can negatively affect that.

I hope this makes sense. Thank you again.

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Author: Minxie Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18128 of 25242
Subject: Re: 401K contribution limit question Date: 12/1/2004 1:45 PM
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I don't understand your question. To take advantage of the match, you simply need to contribute at the appropriate times. My company matches with each paycheck, therefore I must contribute with each paycheck rather than all at once at the beg. of the year.

Other than that, you only need to contribute at least the minimum to qualify for the match. If you contribute over the minimum, no harm done unless you are a highly compensated employee (special rules for these folks). Hope this helps.

Minxie

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Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18129 of 25242
Subject: Re: 401K contribution limit question Date: 12/1/2004 1:55 PM
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You just need to make sure your contributions are spread so that you make one for all 26 pay periods. If you reach your $14k limit by Thanksgiving, for example, you will lose any opportunity for co-match in December.

Fuskie
Who suggests you recalculate your contribution percentage after receiving a raise or bonus...

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Author: IndecisiveFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18130 of 25242
Subject: Re: 401K contribution limit question Date: 12/1/2004 2:02 PM
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But the after tax contributions still grow tax free until retirement. So if you can afford it, maxing the whole plan including aftertax is a good deal.

Personally I don't see it as a good deal. It is similar to the argument for or against non-deductible traditional IRA. The earnings on after-tax 401k contributions are tax-deferred until retirement upon which withdrawls are taxed as income. IMO, a regular taxable account with tax-efficient investments where withdrawls are taxed at the lower capital gains rate is preferrable. The taxable account gives you more flexibility on the withdrawls. The only benefit I see with after-tax 401k contributions is the legal protection in lawsuits and bankruptcies.

IF


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Author: drome Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18134 of 25242
Subject: Re: 401K contribution limit question Date: 12/1/2004 9:40 PM
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That depends on your company's rules.
For example, do they match up to a preset amount, say 3% or 50 cents on the dollar up to 6% of salary?
Do they match only in periods that you contribute or can you contribute your 14K prior to say September and they will continue to match through the end of the year?
Each plan has its own nuances and you must be aware of them.

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18135 of 25242
Subject: Re: 401K contribution limit question Date: 12/2/2004 12:06 AM
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"The only benefit I see with after-tax 401k contributions is the legal protection in lawsuits and bankruptcies."

I agree that LTBH in a taxable account can work very well. But it does require that you find stock that you can truely hold long term.

Aftertax gives you the flexibility to take your profits and move from investment to investment without paying taxes. Plus you can now convert these funds to a Roth IRA.

Yes, aftertax is not for everyone. The differences get into the range of hair splitting. But the main thing is that you make the savings commitment for retirement. At least with the aftertax 401K that is automatic.

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Author: IndecisiveFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18136 of 25242
Subject: Re: 401K contribution limit question Date: 12/2/2004 12:16 AM
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I agree that LTBH in a taxable account can work very well. But it does require that you find stock that you can truely hold long term.

Many ETFs are tax efficient.

IF



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Author: W401K Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18147 of 25242
Subject: Re: 401K contribution limit question Date: 12/2/2004 10:21 PM
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The limit for 2005 is $14,000. If your are 50 or older in 2005 you may contribute an additional $4,000 as a "catch up" contribution.
There is no percentage limit.
The total dollar amount you can have contributed on your behalf in a year is $42,000 for 2005. This is employee + Employer money. The catch up is not included in this limit. An employer may not take a deduction for contributions in excess of 25% of total payroll.
After Tax contributions are not as common as they were several years ago. Due to the advent of the Roth IRA, and the more favorable tax treatment of LTCG and dividends vs Income. We don't see that many plans offering that provision any longer.

Bill


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Author: 3muttsmom Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18148 of 25242
Subject: Re: 401K contribution limit question Date: 12/2/2004 11:52 PM
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After Tax contributions are not as common as they were several years ago. We don't see that many plans offering that provision any longer.

Bill, I was wondering about this.

While federal law doesn't limit by percentage, my plan does. 15% and that's it - no matter if you're nowhere near the $14K, which I'm not.

I was wondering if the after-tax would allow me to get around this. And, if it had to be explicitly mentioned in the plan literature - it's not.

Thankfully, this is no longer an issue. Beginning in 2005, the company has raised the ceiling to 30%. I'm a very happy camper.

3MM

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