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Hey all, question:

My employer offers both a Traditional 401(k) and a Roth 401(k); I'm confused on Max Contribution.

In 2019, is it accurate to say I can contribute $19,000 to the traditional 401(k) and contribute another $19,000 to the Roth 401(k) for a grand total of $38,000?

Or, is my max contribution $19,000 between the two... i.e. $9,500 in Traditional 401(k) and $9,500 in the Roth 401(k)?

I'm age 46 and single with no other investment accounts except my Roth IRA witch I max out annually.

Thanks!!
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Your employee contribution limit for 2019 is $19,000. This combines your tax deferred 401(k) and your Roth 401(k), i.e. it could be $10,000 tax deferred and $9,000 Roth.

Any match or other employer contributions are in addition to the employee contribution limits.
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In 2019, is it accurate to say I can contribute $19,000 to the traditional 401(k) and contribute another $19,000 to the Roth 401(k) for a grand total of $38,000?

No.

Or, is my max contribution $19,000 between the two... i.e. $9,500 in Traditional 401(k) and $9,500 in the Roth 401(k)?

Yes, although you could split the contributions any way that you want: $19k in Traditional and $0k in Roth all the way to $0k in Traditional and $19k in Roth. The total will have to be $19k or less, though.

If you have only one 401(k) during the year, typically, your employer's plan will stop taking contributions out of your paycheck once you hit the $19k limit. But if you are contributing to more than one 401(k) during a single calendar year, then you are the one who will have to recognize when you've made excess contributions.

I'm age 46 and single with no other investment accounts except my Roth IRA witch I max out annually.

If you have some additional funds, would suggest starting a taxable account, too.

AJ
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Thank you. ))
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Vitamin -

Does your employer's plan allow for non-Roth after tax contributions?
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All of the answers you have received are correct. I just wanted to add that your employer does NOT offer both a 401(k) and a Roth plan. Your employer offers ONE plan that has both 401(k) and Roth "features." It can also have a non-Roth after-tax "feature." The limit specified applies as well to the "individual" - so if you change employers mid-year, in total you still can't exceed the limit for the year.
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mjolah,

You wrote, The limit specified applies as well to the "individual" - so if you change employers mid-year, in total you still can't exceed the limit for the year.

That's not precisely true. You can always exceed the limit, but there are consequences. However I've discovered that there can be situations where exceeding the limit is better than the penalties.

Let's discuss the penalty for exceeding the employee deferral limit. If not timely withdrawn, that penalty is "double taxation" on contributions. That is the official penalty is that you are supposed to amend your return if necessary and pay taxes on the excess in the year you made the excess contribution.

This might be worth doing on purpose if the taxes are less than the matching you receive from your employers. (The employer will usually take back the match and any associated earnings if you make a corrective distribution.) For instance my own employer pays 50 cents on the dollar for every elective employee deferral dollar. If you left another employer for whom you had not hit their cap and took a job here, you would be wise to max-out the employee limit again with my employer because the match will more than pay for the extra taxes.

Also I've noticed that the wording of the penalty rule requires you to include the excess contributions in your taxes. That wording does not seem to account for Roth 401(k) contributions. That is to say Roth 401(k) contributions were already included in your taxable income, so the wording would imply that you only need to include it once. This would seem to suggest that if you make only Roth 401(k) contributions in the year of an excess contribution, you can effectively ignore those excess contributions entirely since there is no penalty and no difference in tax treatment.

In addition Section § 1.402(g)-1 - Limitation on exclusion for elective deferrals and Section 1.404(v)-1(c) Catch-up contribution limit are individual limits and the penalties only appear to apply to contributions made pursuant to these sections. After tax contributions are considered part of Section 1.415(c)-1. Limitations for defined contribution plans, which is the overall plan limit. This limit appears to be per-plan and I'm not aware of any employee specific penalties for violating it. What's more the after-tax contributions have already been included in your income taxes for the year, so the existing penalty wording wouldn't seem to address it in any case.

So it would seem that if you work for more than one employer during the year it might be possible to contribution far in excess of both the employee deferral and plan limits... And if you plan it right and are very lucky you can completely avoid any extra tax liability.

- Joel
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I don't agree. First, the failure isn't supposed to occur, but if left uncorrected, the PLAN risks disqualification. From the IRS website: "Although not the subject of this Snapshot, a plan that does not distribute excess deferrals risks plan disqualification." You can see the context here: https://www.irs.gov/retirement-plans/consequences-to-a-parti...

Second, once the money is OUT of the plan, there is no basis for the matching contribution to remain, as well - and it needs to be forfeited.

Bottom line, not supposed to happen. Must be corrected when it does or the plan has issue. Matching isn't a reason to do it - as it will be rectified as well.
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mjolah,

In response to no particular part of my post you wrote, I don't agree. First, the failure isn't supposed to occur, but if left uncorrected, the PLAN risks disqualification. From the IRS website: "Although not the subject of this Snapshot, a plan that does not distribute excess deferrals risks plan disqualification." You can see the context here: https://www.irs.gov/retirement-plans/consequences-to-a-parti...

Yes. I've previously reviewed that page and several others. Nothing there is news to me and none of it changes my understanding.

Note that if left uncorrected, the PLAN risks disqualification means that the consequences are for the PLAN, not the employee. However the PLAN risks nothing if they have not been timely notified. That's because:

1. Corrective distributions are very time-sensitive, and
2. Plans created by two unrelated employers have no mechanism to cross-check.

Even if the IRS had a process to catch excess contributions directly, the earliest they could realistically do anything about it is February of the following year. This doesn't give the employer plans much time for such corrections.

In any case the IRS has little motivation to catch excess contributions themselves in a timely fashion. It costs resources and normally a late catch usually just means more taxes, interest and penalties due the IRS. I doubt the IRS has seriously considered that some employees might switch between employers in the way I suggested and trying to tailor their process for an unusual edge case would seem rather inefficient.

Finally it's important to bear in mind that the tax code has a penalty process for dealing with excess elective 401(k) contributions that you (the employee) fail to report and have distributed timely. In fact the tax code would seem to implicitly relieve the employer of any responsibility for the excess distribution if they have not been notified in time to make the distribution by April 15th of the following year. Instead the burden (and penalty) shifts to the employee.

Also, Second, once the money is OUT of the plan, there is no basis for the matching contribution to remain, as well - and it needs to be forfeited.

Are you just restating what I said for emphasis? The main reason to not ask for a corrective distribution of excess contributions is to let you keep the entire contribution and and match in (both) Plan(s) and avoid tax friction on future gains. The only reason to do this is if the penalty (double-taxation) for failing to obtain the corrective distribution is less than the matching dollars you might forfeit - assuming your contributions were pre-tax.

However if your excess elective employee contributions were all Roth contributions ... those are already included on your W-2 and you ALREADY pay taxes on them in the current tax year. That would seem to say to me that there is no penalty on excess Roth contributions not distributed timely as a corrective distribution. At least there is not if all of your elective contributions were Roth! (I'm not sure what the result would be if part is Roth and part is pre-tax.)

And, Bottom line, not supposed to happen. ...

Seriously? That's your argument? Really?! It can happen. It does happen. All the time. The employer has no way to know if it does happen. Lots of employees are not savvy enough to realize this is a problem. Ergo, it happens. And I'm confident it happens every year because the distribution list I participate on at work *always* has questions about this issue just before taxs are due. Employees just don't catch it until they go to do their taxes and the tax software (or their preparer) actually looks at their W-2s and tells them about their "mistake".

My argument is simply that since the tax code anticipates that these excess contributions will be missed and has a remedy beyond corrective distributions, you should consider using that option instead of the corrective distributions if it benefits you.

Finally, ... Must be corrected when it does or the plan has issue. Matching isn't a reason to do it - as it will be rectified as well.

Seriously? Again, that's your argument? The Plan knows Jack about the excess contribution unless they are notified about it. But as far as I'm aware the IRS doesn't bother notifying Plans about excess contributions that were never self-reported by the employee. And those are the only two sources the Plan has to discover that an excess contribution has occurred.

So basically your argument that the plan has issues ... has some pretty serious issues of its own.

And since contributions (including match) cannot be withdrawn as a corrective distribution after April 15th, the matching contribution is in fact a potential motivation for intentionally making excess contributions when you have two employers during the year.

BTW, you completely fail to address my comments about Roth (and after-tax) excess contributions. No comment? I'm not surprised. The IRS website doesn't seem to address the topic either. However the penalty rules would seem to address it implicitly ... and I just don't see how you could interpret them to apply penalty taxes on such excess contributions.

Also if you haven't noticed I'm not looking to simply parrot what the IRS website says. I'm looking at the rules and looking for what it and the IRS website do NOT say. This would seem to allow you to make some educated guesses about potential loopholes in our tax system. And if you are in a position to take advantage of such loopholes, why not?

- Joel
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Well, first, if the plan is disqualified, ALL of the participant/employees have consequences. Second, it's probably a career limiting move for any employee to "intentionally" jeopardize the qualification of the plan. Third, it is probably also a career limiting move if when changing jobs you lie to your new employer - who often (always, for my clients) ask if you've made contributions to another plan in that year, and if so, how much. Finally, and fourth, if, and only if, you violate the rules (a wrong in and of itself), the excess deferrals to the subsequent plan are "ineligible contributions" and therefore CAN NOT BE MATCHED. PERIOD. Now, if you keep mum (a stupid scenario in my mind due to the career limiting effect if caught), you are STILL not entitled to the match - and if a match is given on those monies, and caught, it is a disqualifying event.

Just don't do it. It's wrong. It has consequences to the plan, the employer, and ultimately to all employees and participants. Including terminating the liar.

Sorry. I just don't buy (ever) "gaming the system" for one's own gain when clearly the intent of the law is to not allow for such scenarios - and it could entail consequences for others. As an employer, I would terminate immediately one who did something like that.
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Third, it is probably also a career limiting move if when changing jobs you lie to your new employer - who often (always, for my clients) ask if you've made contributions to another plan in that year, and if so, how much.

Always? Often? HAHAHAHAHAHA

I've had 9 different employers over the past 34 years, all but one of which had no waiting periods (other than getting the paperwork filled out) to make contributions to their 401(k) plans. That one had a 3 month waiting period, and I started there in July, so I still contributed to 2 plans in that year. NONE of those employers ever asked a single question about contributions to a prior employer's 401(k) plan.

About 13 years ago, I self-limited my contributions in the one instance when I knew I could have gone over the limit and I missed maxing out my total 401(k) deferral for the year by about $75. But I only knew about the issue of contributing to 2 different plans because of being on these boards, and I chose to self-limit to avoid having to deal with notifying either employer's plan. Fidelity actually administered both of the plans, and they never gave me any warnings about the possibility of overcontributing. They had my SSN, so they could have cross-checked, but since they gave me no warnings, I doubt that they did. And if the plans had 2 different administrators, nobody but me and the IRS would have known about the overcontribution. And to Joel's point, the IRS doesn't seem to be policing it.

While I would never lie to an employer about this topic, if they asked, I don't think that nearly as many plans are asking as you seem to think are. So unless and until the IRS starts policing this, it seems to be a "don't ask, don't tell" issue, especially given that on the IRS website https://www.irs.gov/retirement-plans/plan-participant-employ... it says If an employee's total deferrals are more than the limit for that year, the employee should notify the plan and ask that the difference (called an excess deferral) be paid out of any of the plans that permit these distributions. (my emphasis added)

Given the cuts in funding for the IRS, I kind of doubt that the IRS will be able to add resources to start policing the issue any time soon.

AJ
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mjolah,

In a general response to my post you wrote, Well, first, if the plan is disqualified, ALL of the participant/employees have consequences. ...

You honestly think the IRS would disqualify an entire 401(k) plan for failing to make a corrective distribution for an excess contribution it couldn't possibly have known about in the time allotted given the current rules?! Sir, you live in a seriously crazy, messed up world.

Also, Second, it's probably a career limiting move for any employee to "intentionally" jeopardize the qualification of the plan. Third, it is probably also a career limiting move if when changing jobs you lie to your new employer - who often (always, for my clients) ask if you've made contributions to another plan in that year, and if so, how much.

I doubt that too. If I'm wrong, I could just claim it was a mistake. Even if it's just a misunderstanding of how things work, it's still a mistake. But I don't think I misunderstand.

In any case no employer I've worked for has ever asked me such a questions in the past 35 years. Ever. And I'm on my 10th employer. [9th with a 401(k) plan.]

If your employers actually asked about these things, they're extremely unusual in my experience. Either that or you're just making up this entire line of argument.

And, Just don't do it. It's wrong. It has consequences to the plan, the employer, and ultimately to all employees and participants. Including terminating the liar.

I never once said to lie. I don't appreciate you suggesting I did. I just suggested that in some narrow cases it's worth taking what is usually considered a punitive penalty rather than report the excess contributions timely.

And in my experience no employer has every asked me questions about prior 401(k) plan contributions. Ever. If they don't ask and I've not been told to tell them and if the IRS has a proscribed penalty that falls squarely on me for failing to tell them timely, I don't see that this causes them any harm and I don't see it as a lie. It's just following the proscribed process … even if the outcome might not be quite what Legislature expected.

Finally, Sorry. I just don't buy (ever) "gaming the system" for one's own gain when clearly the intent of the law is to not allow for such scenarios - and it could entail consequences for others. As an employer, I would terminate immediately one who did something like that.

The law is just a set of rules. I always recommend following the rules. But I couldn't give a … about what you or anyone else thinks the intent of a law is. That is just an opinion and is completely irrelevant if I'm following the rules as they are written. A plain reading of the law by the affected party always trumps any re-interpretation.

And if you as an employer didn't provide me timely written notice of your company's specific reporting requirements, I'd likely sue you and drag your name through the press if you did fire me for it... Though I'm pretty confident you'd never actually find out about it in any case.

- Joel
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ood for you.... Being in the 401(k) business - we provide EACH of our 6500 clients with a new hire checklist. Do they 100% follow it? No, of course not. BUT we have processes and procedures to guard against the abuse discussed above - and we've had IRS auditors find errors, and make plan sponsors make corrections.

My point is, gaming the system is DISHONEST, and cause OTHERS to have problems. Do that makes you a certain kind of person, that wouldn't last long in my organization.

What kind of person do you want to be?
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"You honestly think the IRS would disqualify an entire 401(k) plan for failing to make a corrective distribution for an excess contribution it couldn't possibly have known about in the time allotted given the current rules?! Sir, you live in a seriously crazy, messed up world."

Yes. And I've seen it happen for less egregious violations. The norm would be to disqualify and impose tax consequences to teh HCEs. But in my experience (especially with small to mid-sized employers) is that if the IRS does that, the employer just terminates the plan entirely - eliminating the headaches - which has consequences to ALL employees.

"I doubt that too. If I'm wrong, I could just claim it was a mistake. Even if it's just a misunderstanding of how things work, it's still a mistake. But I don't think I misunderstand."

OK. Well, first, that makes you a dishonest person. It probably would manifest itself elsewhere. Second, if you happened to search on work computers for what we discuss, you'd be proven a liar (and most employers can, and some do, check such things). Third, go back to my first point. What kind of person do you want to be?

"The law is just a set of rules. I always recommend following the rules. But I couldn't give a … about what you or anyone else thinks the intent of a law is. That is just an opinion and is completely irrelevant if I'm following the rules as they are written. A plain reading of the law by the affected party always trumps any re-interpretation."

So what part of the "law" are you referring to? The STATUTORY law PROHIBITS exceeding the 402(g) limit. PLAIN READING - NOT ALLOWED. The IRS "regulations" indicate ways to fix it, if a violation exists. The regulations are but "guidelines" but the STATUTE is the "LAW." When in doubt, follow the LAW. And by the way, there is a SCOTUS case from 1969 (O'Neill was commissioner of the IRS - search for it). An attorney I worked with argued that case on behalf of a client of the firm I worked for. He successfully argued that the IRS' interpretation of the LAW (the statute) is but ONE interpretation of the law, and not necessarily the correct one. In that case, the regs prohibited a client from doing what they wanted to do, under the STATUTE, and the SCOTUS agreed with him (the attorney was Dean Hopkins). The principle works the other way to. If the IRS allows something the LAW doesn't - it would be a good idea to still follow the LAW.

In any event. Lying, gaming the system, playing fast and loose with the "guidance" is just not the way I run my practice, nor is it the kind of person I want to be.
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My point is, gaming the system is DISHONEST, and cause OTHERS to have problems. Do that makes you a certain kind of person, that wouldn't last long in my organization.

What kind of person do you want to be?


Where did I ever say I gamed the system or would be dishonest? In fact, I specifically said I self-limited my contributions in the one instance when I knew I could have gone over the limit and I would never lie to an employer about this topic, if they asked.

Your aspersions about me being dishonest are way off base, but don't worry, I probably wouldn't want to work in your organization very long, if at all, since you seem to be the kind of person who assumes the worst of people.

My point, which you didn't seem to get, was that plan administrators (like Fidelity) and employers (like my 9 employers), at least in my experience, DO NOT ask about prior contributions when an employee starts a new job. And given that more and more people have multiple jobs, and are starting side businesses where they may start solo 401(k)s, they probably should be asking every year, not just when the employee starts a new job. (Are you telling employers to ask this of all employees every year?)

And because most people DON'T understand that the limits are placed on the employee's contributions to all plans contributed to during the year (I didn't until several years after I started reading these boards, and there are multiple threads in these boards where people have shown that they don't understand these rules), these mistakes ARE happening.

The first point that many people figure this out is when they do their taxes, and the tax software pops up with a warning that they overcontributed, and will be charged tax on the overcontribution (assuming that it's a Traditional contribution). Even then, does the tax software tell them to notify their employer? (I don't know because, as I said, I self-limited, so I never got the warning.) And if it does, how many people are actually following through on that? Less than 100% of the people who got the warning, I'm sure. And if the overcontributions are to Roth accounts, is there even an extra tax involved? Since the Roth contributions have already been taxed, what's the remedy for excess Roth contributions, and will the tax software notify them of the overcontribution?

The IRS seems to be taking the stance that it's up to employees to notify their employers, rather than policing the issue themselves. At least, in 20 years, I've never seen anyone talk about getting a letter about excess 401(k) contributions on these boards, and I didn't find any instances by googling, either. (I did find lots of articles about how to correct the excess contribution, but never found anyone talking about getting a letter from the IRS about an excess 401(k) contribution.) Given that the IRS is the only one, other than the employees, who actually have enough information to know that there was an issue, the IRS is the only ones who could police this. (Even if administrators and employers ask, who's to say that they get the correct answers?) Which brings me back to my point of - if the IRS isn't policing this, there are excess contributions in plans right now, that employers don't know about, and won't be notified of by their employees. It could be because someone is 'gaming the system' and 'being dishonest', but in most cases, it's probably because of ignorance, IMO.

AJ
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Your employee contribution limit for 2019 is $19,000. This combines your tax deferred 401(k) and your Roth 401(k), i.e. it could be $10,000 tax deferred and $9,000 Roth.

Any match or other employer contributions are in addition to the employee contribution limits.



And any employer contributions will be made to the regular 401k, not Roth.

One way to think about balancing the Roth/regular portions is to look at your anticipated marginal tax rate. If you were in the 12% bracket and had another $5000 of income to go before hitting the 22% bracket, then put $5K more towards the Roth part and pay taxes at 12% now to avoid ??% later. Some people will also rather pay 22% now to avoid ??% later, because they believe that it'll all be higher later.
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mjolah,

You wrote, So what part of the "law" are you referring to? The STATUTORY law PROHIBITS exceeding the 402(g) limit. PLAIN READING - NOT ALLOWED. The IRS "regulations" indicate ways to fix it, if a violation exists. The regulations are but "guidelines" but the STATUTE is the "LAW." When in doubt, follow the LAW. …

All right. You asked. Quoting IRC 402(g)(2), copy and pasted from https://www.law.cornell.edu/uscode/text/26/402 :

(2) Distribution of excess deferrals
(A) In general If any amount (hereinafter in this paragraph referred to as “excess deferrals”) is included in the gross income of an individual under paragraph (1) (or would be included but for the last sentence thereof) for any taxable year—
(i) not later than the 1st March 1 following the close of the taxable year, the individual may allocate the amount of such excess deferrals among the plans under which the deferrals were made and may notify each such plan of the portion allocated to it, and
(ii) not later than the 1st April 15 following the close of the taxable year, each such plan may distribute to the individual the amount allocated to it under clause (i) (and any income allocable to such amount through the end of such taxable year).
The distribution described in clause (ii) may be made notwithstanding any other provision of law.


The word may is considered permissive in US law. See page 25 of the "Federal Plain Language Guidelines": https://www.plainlanguage.gov/media/FederalPLGuidelines.pdf

So this section gives the individual the option to report the excess, but not the requirement. It also does not require the employer to distribute the excess. In fact I've seen wording on the IRS website say that a plan does not have to permit excess contribution distributions at all, though I'm not going to go searching for that since you said the statute was sufficient.

Also notice that requests must be made to a plan no later than March 1st - not April 15th.

Also quoting IRC 401(a)(30) copy and pasted from https://www.law.cornell.edu/uscode/text/26/401 :

(30)Limitations on elective deferrals.—
In the case of a trust which is part of a plan under which elective deferrals (within the meaning of section 402(g)(3)) may be made with respect to any individual during a calendar year, such trust shall not constitute a qualified trust under this subsection unless the plan provides that the amount of such deferrals under such plan and all other plans, contracts, or arrangements of an employer maintaining such plan may not exceed the amount of the limitation in effect under section 402(g)(1)(A) for taxable years beginning in such calendar year.


These are the sections of the law that the IRS website repeatedly cites when talking about disqualifying plans for failing to limit elective contributions. Notice that the language in the statute only requires the employer to restrict contributions associated with plans they control?

There is simply no statutory requirement for a plan to prevent or return excess contributions made to another employer's plan - only permissive language that allows for corrective distributions as a potential fix for the individual so they can avoid the "double taxation" penalty for exceeding the elective contribution limit. And as far as I can tell you are making that other stuff up just to scare people.

Saying I'm lying or gaming the system without knowing the facts or knowing the law or knowing me makes me wonder what kind of practice you have. Given how you've treated me here, I certainly don't think I'd want you as either an employer or vendor.

And if I'm wrong here … I still say it's an honest mistake. But I don't think I'm wrong. I think you are. Now try again and tell my why I'm wrong, a fraud and a cheat.

BTW, for everyone else … I've never done what I'm suggesting here. I've always limited my contributions whenever I changed employers. The main reason I did that was out of an uninformed fear of the consequences - not that I could have profited from it anyway. Indeed, that's probably the normal case. All I'm saying here is that dismissing the idea out of hand without analyzing all possible scenarios is silly and you are potentially missing out on an opportunity. So find facts that make it not cost effective before dismissing the idea and don't automatically assume keeping the excess contribution in the account is always the wrong thing to do.

Also you should know that I'm not a financial planner, nor am I involved in the retirement benefits industry. I'm also not a lawyer. I'm a computer programmer currently employed by Microsoft. The company has an internal email discussion list where we talk about investing, company benefits and taxes. This very topic came up a year or two and initially I argued against this tactic I mentioned in this thread. But the person proposing it shot down all my arguments with facts. We also know from experience that management (right up to Satya Nadella) will from time to time intervene in open DL discussions and we have no reason to believe this DL is not also being monitored.

In fact Microsoft is the first employer I've had who's match was generous enough to consider this. And their match wasn't as good as it is now when I joined (they changed it 2-3 years later), so I still might not have used this strategy even if I'd known about it at the time.

Finally I'd like to apologize to vitamin for hijacking this thread and taking it on a tangent. :-)

- Joel
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