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Author: StockGoddess Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Too much in the 401K? Date: 5/20/2011 2:22 PM
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DH was updating his "benefits" the other day. He's got a 401K that he puts half into a Roth 401K and half into a regular 401K.

Last year he got a raise which pushed his contribution amount over the limit. I noticed this but he said he didn't want to decrease his retirement donations.

What will that do - if he's putting, say, 10K into each type of 401K will they just stop taking out money when he hits $16,500 or just stop giving him a tax break on the non-Roth one, or should we fix this, or what?
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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69036 of 75383
Subject: Re: Too much in the 401K? Date: 5/20/2011 3:06 PM
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StockGoddess asks,

What will that do - if he's putting, say, 10K into each type of 401K will they just stop taking out money when he hits $16,500 or just stop giving him a tax break on the non-Roth one, or should we fix this, or what?

</snip>

When I was working, they just stopped deducting the contribution from your paycheck when you reached the 401k limit, so by June you were done with employer-sponsored retirement contributions.

intercst

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Author: op456op Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69037 of 75383
Subject: Re: Too much in the 401K? Date: 5/20/2011 3:20 PM
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I think it may depend on the plan. Since it includes a Roth 401k I don't know how that would work. Call the plan administrator for clarification.

When I had a 401k and went over the max amount, it still continued to take out the deduction but on an AFTER tax basis. So while you're still investing in the 401k selections, it is with monies already taxed. Which is why you need to keep track of it so you won't pay taxes on that portion of the 401k when withdrawn/distributed.

Alternatively, you could have the employer stop taking it out when the max is reached and invest that amount on your own with unlimited options as opposed to having to invest in the 401k options only. Depending on what you selected you might save on fees and such.

I let mine ride since it was going into a "stable value fund" and it's probably what I would have put it in on my own (CD's).

When I retired and rolled it over I took the after tax monies as a distribution then.

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Author: op456op Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69038 of 75383
Subject: Re: Too much in the 401K? Date: 5/20/2011 3:25 PM
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So, as you can see from intercst and my replies, it DOES depend on either the employer or the plan.

So the plan administrator will be able to explain the rules for DH's plan.

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69039 of 75383
Subject: Re: Too much in the 401K? Date: 5/20/2011 5:40 PM
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The answer to your question on the max 401(k) contribution DH may make is a bit complicated and will depend on how the 401(k) plan is written. There are a few 'hard' rules, though...

1. The maximum amount he may dontribute from his salary to his 401(k) pretax each year is $16,500 (2011). If he is 50 or older this year, that may be increased by $5,500. This can be divided up between the regular 401(k) and the Roth part of the 401(k), as the plan allows.

2. If DH has earnings of over 110,000, he will be highly compensated and his maximum salary deferral may be reduced in order for the plan to meet non-discrimination testing. If his salary is less than this, his ability to contribute up to the maximum amount in #1 is generally not affected.

3. Some plans allow for after tax contributions once the employee has met the maximum contribution amount. Again, if DH is highly compensated, this may, and usually is, limited.

Once his maximum has been reached, and many will argue that to the extent his contribution will be matched by the employer, any additional contributions should probably be made to your own Roth IRA. If your combined adjusted gross income (from tax form 1040) is over $179,000 you cannot contribute to a Roth, then contributing to your own traditional IRAs is usually desirable. It won't be deductible if your household AGI is over $110,000, but will be fully deductible if your AGI is under $90,000 (2011)

BruceM

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Author: RHinCT Big red star, 1000 posts Ticker Guide SC1 Red Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 69040 of 75383
Subject: Re: Too much in the 401K? Date: 5/20/2011 7:00 PM
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One other possible joker in this deck...

Suppose you are putting in 10% of your salary, and the company is matching the first 4%. If you hit the limit half way through the year, and that stops the deductions, the match for the year comes to only 2% rather than 4%.

Obviously this scenario needs to be reviewed with the employer to understand their plan's actual rules.

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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: 69041 of 75383
Subject: Re: Too much in the 401K? Date: 5/20/2011 10:43 PM
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If you hit the limit half way through the year, and that stops the deductions, the match for the year comes to only 2% rather than 4%.

Obviously this scenario needs to be reviewed with the employer to understand their plan's actual rules.


In this case, my company (Motorola) did what they called a "true-up" at the end of the year. They figured out what the company match would have been if your comtribution had not been cut off by hitting the max, and put in that amount all at once. IIRC in late January.

I understand many companies do this.

I didn't like it because it's just too danged hard to verify that they did it right, plus they can always change their mind and skip the true-up, plus their money goes in late in time so you miss out on the growth of it. The one time I let this happen, I did check the true-up and it was accurate.

After that, I just planned it so that I put in the max early in the yesr, but cut it down to 3% (the maximum company match amount) about mid-year, so that I'd hit the max on my last paycheck of the year.

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