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Author: killerfraug Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: Contributing over the 401(k) limit Date: 12/13/2008 12:52 PM
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Does anyone know what happens in the case of exceeding the max contribution limit for a 401(k)? In my case, I am at about $15,100 for the year with 1 more paycheck to go. My next paycheck will put me over the limit for the year. What happens in this case? Does the amount that puts me at the max only get added ($400) and the remainder stays in my pay? Does my full contribution get added to my account, and I get penalized? Does the amount that is over the limit (mine will only be over by about $60) get added as after-tax contribution? Something else?

This year I met the max by including my bonus? Next year I will hit the max by my salary alone (excluding potential bonus). The same situation would be possible next year if I get a bonus, except the amount over the limit will be much greater. Is there any way to avoid this?

Thanks for the help.

BTW, the 401(k) is held at Fidelity.
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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64840 of 74759
Subject: Re: Contributing over the 401(k) limit Date: 12/13/2008 2:08 PM
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Does the amount that puts me at the max only get added ($400) and the remainder stays in my pay?

Yes. Your employer will cut off your contributions at the cap.

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Author: goodeeds Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64841 of 74759
Subject: Re: Contributing over the 401(k) limit Date: 12/13/2008 2:22 PM
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Does the amount that puts me at the max only get added ($400) and the remainder stays in my pay?

Yes. Your employer will cut off your contributions at the cap.


It depends on your program. In my case, anything over the max is added as after tax. My balance is composed of the following sources:
basic pre-tax, Roth after tax and additional after tax. I really try to limit the additional after tax as it does not benefit from tax free growth like the Roth or from tax deferred contribution like the pre-tax.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64842 of 74759
Subject: Re: Contributing over the 401(k) limit Date: 12/13/2008 3:23 PM
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There are a few things that might change your situation,

1) If you are over 50 years old it is likely that you can make and additional $5,000 “catch up” contribution.

2) The $15K limit is only for your contributions and does not include any employer match, your post wasn’t clear if you were counting any employer match in the $15K

3) If your company has a Roth 401K, then next year you could contribute some to it instead because each dollar in the Roth 401 will represent more buying power.

4) Some 401k’s have contribution limits for “Highly Compensated Employee”(HCE) because they didn’t have enough contributions from lower paid employees. You should check with your payroll department to see if this applies to your company and if so what the limit is. If you exceed this then you could get a check back in February for the excess contributions which can cause all sorts of tax complications.

Greg

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Author: grumpyretiree One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64844 of 74759
Subject: Re: Contributing over the 401(k) limit Date: 12/13/2008 6:19 PM
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You need to check with your employer. Most employers have safeguards built into there payroll systems so that this "over-contribution" can't happen. I know that my former employer, Wells Fargo, did that, and I always had a little bit of extra net pay available from the final paycheck of each year.

Gary

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Author: killerfraug Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64847 of 74759
Subject: Re: Contributing over the 401(k) limit Date: 12/13/2008 8:12 PM
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Wow, thanks so much for the very helpful and detailed responses. This place is awesome.

Watty:
1) I'm only 34, so that won't apply yet.
2) I wasn't including the company match - it's nice that that part doesn't get counted. I can't believe the government allows that.
3) I will look into the Roth 401k. My plan does offer that option. I never really understood the combination of all of those accounts and how the contribution limits apply - and does the Roth 401k have any bearing on a Roth IRA contribution limit.
4) I'm not an HCE yet but getting very close. I'll look into that too.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64849 of 74759
Subject: Re: Contributing over the 401(k) limit Date: 12/13/2008 11:14 PM
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2) I wasn't including the company match - it's nice that that part doesn't get counted. I can't believe the government allows that.

Actually, the government does count the employer contribution, with a different limit.

For 2008, the employee limit, if younger than 50, is $15,500 for employee contributions, and the the combined employer and employee contribution limit is $46,000. (If 50 or older, add $5,000 to these limits.)

So if an employee contributes the maximum of $15,500, the employer can contribute up to $30,500.

For 2009, the limits for younger than 50 are $16,500 for employee contributions, $49,000 for the combined limits and $5,500 catch-up for 50 or older.

3) I will look into the Roth 401k. My plan does offer that option. I never really understood the combination of all of those accounts and how the contribution limits apply

For 2009, if you are in the 25% bracket, putting the $16,500 in the pre-tax account will save you $4,125 in taxes. However, you could put the same $16,500 into the Roth account, but you would have to pay the $4,125 in taxes, so it would cost you $20,625 in gross wages.

Assuming that the $16,500 grows at 8% for 30 years, it would grow to just over $166k. If you were to withdraw the money from the pre-tax account and the tax rate is 25% you would end up with about $124.5k. However, from the Roth account, you would still have the $166k.

There are a couple of caveats that you should consider with this:

- The effective tax rate for current retirees is generally in the 15% - 20% range when the marginal rate is 25%, due to the effect of the 10% and 15% brackets.

- On the other hand, it is very possible that tax rates for all brackets will increase between now and 30 years from now, or bracket inflation may not continue to occur. After all, the 30 year bonds that are being sold now to finance the deficit will become due by then.

- Another risk may be that Congress will change the rules and make Roths taxable in some way or another to pay for those 30 year bonds.

- and does the Roth 401k have any bearing on a Roth IRA contribution limit.
4) I'm not an HCE yet but getting very close. I'll look into that too.


Contributions to Roth 401(k)s do not have any direct bearing on your ability to contribute to a Roth IRA. However, since you are approaching HCE territory, if you file single or HOH, you may need to make some of your contributions to the pre-tax account in order to decrease your taxable income to keep your MAGI below the limit to contribute to a Roth. If file MFJ, and your spouse earns in the $50k+ range, one of you may need to contribute to a pre-tax account in order to keep your joint MAGI below the Roth contribution limits.

AJ

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Author: PSUEngineer 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: 64851 of 74759
Subject: Re: Contributing over the 401(k) limit Date: 12/14/2008 12:14 AM
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For 2009, if you are in the 25% bracket, putting the $16,500 in the pre-tax account will save you $4,125 in taxes. However, you could put the same $16,500 into the Roth account, but you would have to pay the $4,125 in taxes, so it would cost you $20,625 in gross wages.

Assuming that the $16,500 grows at 8% for 30 years, it would grow to just over $166k. If you were to withdraw the money from the pre-tax account and the tax rate is 25% you would end up with about $124.5k. However, from the Roth account, you would still have the $166k.


To be fair, $4125 should be invested in a taxable account if you are using a pre-tax account.

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Author: SirTas 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: 64852 of 74759
Subject: Re: Contributing over the 401(k) limit Date: 12/14/2008 1:07 AM
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Your employer will cut off your contributions at the cap.

That's what happened with me -- but my employer was even stricter. During the first half of the year I was in a higher-paying position than I knew I was going to be in during the latter half. So I wanted to make larger 401(k) contributions then -- but payroll wouldn't let me make those larger contributions because, if I had contributed that much throughout the year, I would have gone over the limit. So they capped the amount that was taken out of each check.

--SirTas

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Author: killerfraug Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64856 of 74759
Subject: Re: Contributing over the 401(k) limit Date: 12/14/2008 3:19 PM
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Again, thanks for all of the extra information on top of what was already given. I really appreciate not having to do the digging for all of this.

One note though. I did find that contributing to a Roth 401k does not increase the limit for the year. The $15,500 ($16,500 next year) limit applies to the combined 401k contribution whether it be Roth, traditional or after-tax - the same way as IRA limits apply.

aj485:
So if an employee contributes the maximum of $15,500, the employer can contribute up to $30,500.

I am WAY below that on the company match (3% match means I'd have to be making $1.017M), so no worries there.

On your tax example: I will have to do some more learning. I still am not knowledgeable enough on taking advantage of tax breaks.

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