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I am working as a US military contractor overseas so I don't have to pay US income tax (form 2555), nor do I pay any foreign taxes. The only things I have to pay are FICA and medicare. I am currently investing 10% of my income into a 401(k) and believe that I should increase it to the maximum allowed.

My first question is, what is the maximum allowed? I know $10,500 is the max, but what is the max percentage allowed? I believe that I read 15% but my company insists that it is 20%. I am just trying to keep myself out of hot water.

My second question is - should I max out my 401(k)? I have already maxed out my Roth IRA.

Thanks for any insight you have,
Brian
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Greetings, Brian, and welcome. You asked:

My first question is, what is the maximum allowed? I know $10,500 is the max, but what is the max percentage allowed? I believe that I read 15% but my company insists that it is 20%. I am just trying to keep myself out of hot water.

It really depends on your plan. It can be as low as 15% or as high as 25%. Your administrator says you alone may contribute 20%, so your plan limit has to be 25%. In reality, there are two limits. For a fully tax deductible contribution, you alone are limited to a maximum of $10,500 or (if lesser) 25% of your pay. The plan itself may dictate a lesser percentage of pay as the maximum contribution. Yours obviously does.

The second limit says that together, you and your employer may not contribute more than 25% of your compensation or $30K, whichever is less. That limit means you could contribute more than $10.5K, but anything above that amount would not be a deductible contribution. In your case, assuming your company will let you contribute more, the deductibility issue hardly seems to matter. I would think your plan administrator can tell you more as to what that means in terms of taxable income when you finally make withdrawals from that plan.

Should you put more into the 401k? Maybe. That depends on the options and what you would do otherwise. You need to look at the issue. For some tips on how to do that kind of analysis, see my article "When Not to Use Your 401k Plan" at http://www.fool.com/retirement/retireeport/2000/retireeport001023.htm.

Regards..Pixy
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I have already maxed out my Roth IRA.

Using what as a basis? To contribute to a Roth IRA you must have taxable compensation, and if you're excluding all of your earned income under the foreign earned income exclusion, you have none.

We've discussed this problem, and some approaches to it, on the Tax Strategies board.

TMF ExRO
Phil Marti
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