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It depends on the rules of the plan. Most 401(k) plans I've worked with the max annual salary deferral is divided by 12 to determine max monthly contribution.

I'm not sure your sample is representative. In the 10 401(k) plans that I had throughout my career, none of them ever had a monthly limit calculated like that. All limits were all based on % of income that the employee could contribute, up to the deferral limit. The used to be a Federal law limiting the % of income that could be contributed to 25%, which is why many plans based their limits on a % of income. When the EGTRRA* (Economic Growth and Tax Relief Reconciliation Act) was passed in 2001, the legal limit on % of income was lifted, and just required that SS and Medicare taxes be withheld - which effectively limits anyone who makes less than the SS tax cap to 92.35% Many plans were slow to enact the new limits, and many still set limits lower than the max allowed.

*This was also the legislation that authorized Roth 401(k) accounts, although plans could not start offering Roth 401(k) accounts until 2006.

AJ
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Is it permissible to work for a few months at the beginning of one's retirement year, putting 90+% of salary into the 401k, until the annual limit is reached?

Yes. I have done so.

I ask this from the standpoint of tax law, not what a particular company allows.

But your company's plan does need to let you make contributions that are 90%+ of your salary. Not all plans do.

AJ
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Is it permissible to work for a few months at the beginning of one's retirement year, putting 90+% of salary into the 401k, until the annual limit is reached?

Yes, I did it the last year of my employment. I don't think they let me put in 90%, but I put in the max I could. My take home pay was almost zero for a few months.
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I don't think they let me put in 90%, but I put in the max I could. My take home pay was almost zero for a few months.

I just checked and 35% is the max allowed. Doh!
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I just checked and 35% is the max allowed. Doh!


+++
+++


You might wanna verify that there are NOT any additional Limits/Limitations.

One of my previous employers had a quarterly limit {which dovetailed with their maximum match}!
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I just checked and 35% is the max allowed. Doh!

Annual bonus is paid in February - Boom!

d(80% max)/dTarr
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"I don't think they let me put in 90%, but I put in the max I could. My take home pay was almost zero for a few months."

Might be worth looking at what the tax bracket issues might be. It seems to me you might be saving this last year's contributions at a lower rate than you will have in distribution.
That has a lot of variables of course. Whether you will immediately be drawing down next year, what other income you have this year and in retirement, total size of the 401K and other IRAs etc.
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Might be worth looking at what the tax bracket issues might be. It seems to me you might be saving this last year's contributions at a lower rate than you will have in distribution.
That has a lot of variables of course. Whether you will immediately be drawing down next year, what other income you have this year and in retirement, total size of the 401K and other IRAs etc.


Agreed. The idea here is to work a couple of months -- or as long as it takes to contribute the 2020 limit of $26,000. So the annual income would be more retirement-like.

In my case I don't anticipate withdrawing until RMDs in 10 years. But with a 35% maximum contribution I'm not going to hit the IRA annual max for 2020, unless I change my mind about how long to work.
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The idea here is to work a couple of months -- or as long as it takes to contribute the 2020 limit of $26,000. So the annual income would be more retirement-like.
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But with a 35% maximum contribution I'm not going to hit the 401(k) annual max for 2020, unless I change my mind about how long to work.


There, fixed that for you.

Since you're only going to be working part of the year, if your 401(k) plan has a Roth option, you should consider making contributions to the Roth account in 2020. When you are limited by the % of your income that you can put in, putting in after-tax dollars effectively gets more into the retirement account, since you will be able to draw on it tax-free in the future. And since you're only working part of the year, your income will likely be in a lower bracket than you otherwise would have been, so you won't be giving up as much of a tax break as you have had in past years.

Even if you don't already have a Roth IRA, when you leave the company, you can roll the Roth 401(k) account over into a Roth IRA and wait until the Roth IRA is at least 5 tax years old, and then take tax-free withdrawals.

Since you are already going to be working only part of the year in 2020, even if you haven't been able to make Roth IRA contributions in the past, you may be able to make one in 2020, because your income will be lower. I would suggest doing so.

In my case I don't anticipate withdrawing until RMDs in 10 years.

With the current low tax rates, you may want to consider doing Roth conversions for the next few years. If you're not anticipating having to take money from your Traditional 401(k) for another 10 years, that would suggest that you have other savings, investments, SS and/or a pension that will provide enough income for your lifestyle. So when you start taking RMDs, the RMD income will be on top of your other income, which could easily move you to a higher tax bracket. And considering that under current law, in 2026, what is currently the 22% bracket will be increased to 25%, the ability to make conversions at 22% (or even 24%) would result in tax savings. Add to that the likelihood that one of you will have to file as a single filer at some point, with lower income limits on the brackets, and you could have significant tax savings by doing conversions.

AJ
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A related topic is what happens with Social Security payments. Assuming you are not planning to begin Social Security payments in the year you retire. If you were, the income might cause problems.
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aj485 sez...
Add to that the likelihood that one of you will have to file as a single filer at some point, with lower income limits on the brackets, and you could have significant tax savings by doing conversions.


I think that's a great point to consider
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It depends on the rules of the plan. Most 401(k) plans I've worked with the max annual salary deferral is divided by 12 to determine max monthly contribution. The max pre-tax salary deferral amount is usually based on the max amount that can be deferred in order to stay within the ERISA non-discrimination standards.

BruceM
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It depends on the rules of the plan. Most 401(k) plans I've worked with the max annual salary deferral is divided by 12 to determine max monthly contribution.

I'm not sure your sample is representative. In the 10 401(k) plans that I had throughout my career, none of them ever had a monthly limit calculated like that. All limits were all based on % of income that the employee could contribute, up to the deferral limit. The used to be a Federal law limiting the % of income that could be contributed to 25%, which is why many plans based their limits on a % of income. When the EGTRRA* (Economic Growth and Tax Relief Reconciliation Act) was passed in 2001, the legal limit on % of income was lifted, and just required that SS and Medicare taxes be withheld - which effectively limits anyone who makes less than the SS tax cap to 92.35% Many plans were slow to enact the new limits, and many still set limits lower than the max allowed.

*This was also the legislation that authorized Roth 401(k) accounts, although plans could not start offering Roth 401(k) accounts until 2006.

AJ
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It depends on the rules of the plan. Most 401(k) plans I've worked with the max annual salary deferral is divided by 12 to determine max monthly contribution.

Definitely depends on the rules of the specific plan, but I have not seen monthly contribution limits at the few places that I have worked. These were typically very large companies, and perhaps that made a difference. In one case, I knew that a layoff was coming, and so I changed my 401(k) percentage to something like 92% so that there would be enough left to pay for my tax withholding and medical insurance. Essentially, I took home less than $10 per pay period, but I maxed out my 401(k) to the annual limit.

When I retired 2 years ago on June 1, I set up my 401(k) contributions to max out in the first 4 months of the year. And for that company, they trued up their matching for folks who did not do equal contributions over the year in the next year, so I actually got the whole employer match even though it did not show up until almost a year after I had left.

So it definitely depends on the plan rules, but I have never run into monthly contribution limits, and have been able to use that to my advantage to meet the annual contribution limits in a time frame that was much shorter than a year.
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When I retired 2 years ago on June 1, I set up my 401(k) contributions to max out in the first 4 months of the year. And for that company, they trued up their matching for folks who did not do equal contributions over the year in the next year, so I actually got the whole employer match even though it did not show up until almost a year after I had left.

Its been a while so not sure if the rules have changed that much, but as I recall the EPCRS report that measures plan compliance and allows self-fixing and self-reporting, was done quarterly. If highly compensated employees had contributed more than 70% of total contributions, the plan would have exceeded its statutory limits thus requiring correction, such as returning HCE contributions/matching. This could restrict plan contributions, at least for the HCE. So, again as I recall, contributions as % of salary, were made monthly, although I'm sure there would have been exceptions.

The used to be a Federal law limiting the % of income that could be contributed to 25%, which is why many plans based their limits on a % of income. When the EGTRRA* (Economic Growth and Tax Relief Reconciliation Act) was passed in 2001, the legal limit on % of income was lifted, and just required that SS and Medicare taxes be withheld - which effectively limits anyone who makes less than the SS tax cap to 92.35%

Actually, prior to EGTRRA, the maximum deductible contribution was 15% of eligible salary, calculated after any salary deferral. EGTRRA changed the employer’s max deduction for contributions to a profit sharing or stock bonus plan by increasing from 15% to 25% of the participants’ aggregate compensation before deferral. IOW, 401(k) deferrals are not counted for purposes of the deduction limits. However, 401(k) deferrals were still included for purposes of calculating the compensation on which this limit is based. Prior to this, the only way to contribute up to 25% of eligible salary was through a money purchase pension plan. This was effective for taxable years beginning after 2001. This significantly increased the max amount that could be contributed to one's employer sponsored retirement plan.

Employment tax is calculated on entire salary prior to any deductions, with SS Tax up to salary max and Medicare tax on all of salary. Not sure, but I don't think EGTRRA changed this.

BruceM
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