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I looked at past messages and didn't find what I needed. Hope y'all don't mind a newbie to this board.

Next year, I'm thinking about accelerating my $16,000 401(k) contribution into the first six or seven months of the year. There's a good chance I will then be quitting my job. I would have a job that might have a 403(b) plan, but I wouldn't contribute to it, as those would be excess contributions, right?

Can somebody tell me if it's kosher to accelerate all 401(k) contributions into a compressed period and then quit? I think it is. I just want to make sure.

Thanks!

phantomdiver
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Can somebody tell me if it's kosher to accelerate all 401(k) contributions into a compressed period and then quit? I think it is. I just want to make sure.

phantomdiver
_____________________________________
Yes you can do it. BUT - you may very well contribute/defer more than is allowed, and have part of it refunded back to you early in the following year.

If you can defer $16,000, you must be in the highly-compensated group.
The maximum percent of your pay that you can defer is based partly on what the non-highly-paid employees defer.

Without knowing your circumstances and history, and the plan's, I can't predict more than that. But it's a definite potential problem.

Bill









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Yes you can do it. BUT - you may very well contribute/defer more than is allowed, and have part of it refunded back to you early in the following year.

If you can defer $16,000, you must be in the highly-compensated group.


From what I understand, Uncle Sam sets the dollar limits and different companies may set percentage limits as they like. I'm putting $14,000 into my 401(k) this year, which is more than 20% of my salary. My company took away the percentage requirement a while back and anybody can contribute up to the max.

Anyway, next year I turn 50, and the max for me will be $20,000, I think. What I'm wondering is that if it's okay to do that if I'm at the company for less than a full year.

phantomdiver
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From what I understand, Uncle Sam sets the dollar limits and different companies may set percentage limits as they like.

Sorta. The laws that created 401k plans were designed to make sure that companies don't just set them up for the benefit of highly paid employees. So the plan gets closed if a certain percentage of "regular" employees don't participate. (I think it's that the percentage of highly compensated employees who participate can't exceed the percentage of regular employees or not by too much.)

That's why companies have matching plans, to make sure that many people "ordinary" participate. DH has always worked at companies with really savvy people, so his company offers no matching.

- Megan



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I believe you can do what you suggest as long as your plan allows the percentage of contribution that you would have to use. A couple of points of caution, however.
If you end up reaching your maximum contribution then continue to work you may miss out on some of your employers matching contributions if they provide them. Check with your plan.
If you reach your maximum contribution early in the year and then change jobs you may not be able to contribute to your new employers plan.

Bob
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phantomdiver writes (in part):

From what I understand, Uncle Sam sets the dollar limits and different companies may set percentage limits as they like.

I reply:

That's not completely accurate, for two reasons. One, I'm pretty sure that there's a ceiling on the percentage of income you are permitted to defer. It may be that the company can permit a bigger percentage, but ensuring that you do not make "excess contributions" is your responsibility.

Two, the company must ensure that its plan does not fail the "non-discrimination test" set forth in one of the IRS Publications. I'm working from memory here, but I believe it compares the average deferral percentage among "highly compensated employees" to the average deferral percentage among all employees, and the first number can't exceed the second number by more than 2%. If it does, the company will have to return enough contributions to "highly compensated employees" to permit the plan to pass the test. --Bob
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the company will have to return enough contributions to "highly compensated employees" to permit the plan to pass the test.

Related question - Because I am self-employed on an irregular basis, I adjust my husband's withholdings as the year progresses to keep us in safe harbor. Are we held harmless in the case of 401K returned money because of the non-discrimination test ?

rad
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working from memory here, but I believe it compares the average deferral percentage among "highly compensated employees" to the average deferral percentage among all employees, and the first number can't exceed the second number by more than 2%. If it does, the company will have to return enough contributions to "highly compensated employees" to permit the plan to pass the test.

Just so's everybody knows, I am definitely not a "highly compensated employee" at this company. I'm not even a manager. Practically all the managers make more than I do, and quite a few non-managers do, too.

phantomdiver
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If you end up reaching your maximum contribution then continue to work you may miss out on some of your employers matching contributions if they provide them. Check with your plan.

There's no matching contribution, darn it. So no problem there.

If you reach your maximum contribution early in the year and then change jobs you may not be able to contribute to your new employers plan.

Right. I wasn't planning on contributing to a new employer's plan. Thanks for the tips, though!

phantomdiver
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Next year, I'm thinking about accelerating my $16,000 401(k) contribution into the first six or seven months of the year.

Limit is $15K for 2006. Catch-up contribution for people 50 or older is another $5K.
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phantomdiver writes:

Just so's everybody knows, I am definitely not a "highly compensated employee" at this company. I'm not even a manager. Practically all the managers make more than I do, and quite a few non-managers do, too.

I reply:

You might still be "highly compensated" as that term is defined for these purposes. I believe that all employees with gross income above a certain level are defined as "highly compensated." This is another of those issues that is set forth in the Publication I referenced above. --Bob
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reallyalldone writes (in part):

Are we held harmless in the case of 401K returned money because of the non-discrimination test?

I reply:

http://boards.fool.com/Message.asp?mid=22291676&sort=whole

I doubt it, but under most circumstances I imagine there won't be a problem because the money will usually be included in the following year's income. See Publication 525 and the discussion linked above. --Bob
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One, I'm pretty sure that there's a ceiling on the percentage of income you are permitted to defer.


Is this true? I participate in a 403b to the max (14,000) and I make 46,000 a year. That's approx 30% of my gross income. No match unfortunately.

I was told by my plan administrator that I could contribute the max or my entire net income whichever was less. I've been doing this for 3 years.
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One, I'm pretty sure that there's a ceiling on the percentage of income you are permitted to defer.

Is this true? I participate in a 403b to the max (14,000) and I make 46,000 a year. That's approx 30% of my gross income. No match unfortunately.

I was told by my plan administrator that I could contribute the max or my entire net income whichever was less. I've been doing this for 3 years.


When 401(k) plans began, there were maximum percentage contribution limits on each participant as well as absolute dollar maximums and "top-heavy" limits. The participant percentage contribution limit was changed to 100% of qualifying earned compensation some years ago.

Ira
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The participant percentage contribution limit was changed to 100% of qualifying earned compensation some years ago.

And to implement that change in the law, 401k plans had to be amended to allow the 100% of contributions. By now, I would imagine that most companies have amended their plans, but there's almost certainly a few out there that have not and still limit participants to 15% of their compensation.

--Peter
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