Who else over saved in their 401K?

[QuarterMillionMan]

Today is Nov 1, 2014, and I have max'd out my 401k contribution allowed by the IRS for the year 2014 which is $17,500. As a result, I lose out on my employer's 4% match for the remainder of the year (November & December) and I can't contribute any more for the remainder of 2014. I had over saved and miscalculated my contributions by putting in too much too fast at 25% of my income. I've readjusted my future contributions to avoid this scenario in 2015. Has anyone else over saved in their 401k?

[Goldy]

When I over contribute the excess is automatically taxed and added to my post tax 401k contributions. I try to limit this to as little as possible.

[rennigade]

How are you missing out on your employers 4% match? Because you contributed more...you just grabbed the 4% earlier than you would have if you would have waited till the end of the year to hit the max..right?

4% x $17,500 in January is the same as 4% x $17,500 in December.

[Like2Plan]

Today is Nov 1, 2014, and I have max'd out my 401k contribution allowed by the IRS for the year 2014 which is $17,500. As a result, I lose out on my employer's 4% match for the remainder of the year (November & December) and I can't contribute any more for the remainder of 2014. I had over saved and miscalculated my contributions by putting in too much too fast at 25% of my income. I've readjusted my future contributions to avoid this scenario in 2015. Has anyone else over saved in their 401k?

That is unfortunate!
DH's employer has a rather unusual match (or not what I am accustomed to, anyway). DH's employer matches 25% of contributions up to 17,500. So, employees get the maximum max even if they max out contributions before the year is over. I like they way they do that (which means they will probably change it. )

[corn18]

How are you missing out on your employers 4% match? Because you contributed more...you just grabbed the 4% earlier than you would have if you would have waited till the end of the year to hit the max..right?

4% x $17,500 in January is the same as 4% x $17,500 in December.

That's not how it works. Employers only match up to 4% of each pay period. If you contribute 25%, they don't match that, they just match up to 4% each pay period.

Here's an example (assume biweekly pay for 26 pay periods / year):


Paycheck = $10,000, you contribute $200 (2%), employer matches $200 (2%). Your contribution = $5,200, employer = $5,200. $10,400 total contribution. Notice the employer will not match more than you contribute.

Paycheck = $10,000, you contribute $400 (4%), employer matches $400 (4%). Your contribution = $10,400, employer match = $10,400. $20,800 total contribution. This is a good scenario because you got the max match but you missed out on $6,100 you could contribute.

Paycheck = $10,000, you contribute $673 (6.73%), employer matches $400 (4%). Your contribution = $17,500, employer match = $10,400. Total contribution = $27,900. This is your best case scenario. Contribute less than this rate and you miss out on maxing YOUR contribution. Contribute at higher than this rate and you lose employee match (see the next scenario).

Paycheck = $10,000, you contribute $1,000 (10%), employer matches $400 (4%). Your contribution is $17,500 (max for year), but you only contributed for 17.5 pay periods. That mean you only get a match for 17.5 pay periods. 17.5 x $400 = $7,000. You just lost $3,400 in employee match because you contributed too much, too fast.

Paycheck = $10,000, you contribute $2,500 (25%), employer matches $400 (4%). Your total contribution = $17,500 (max for year). But this is even worse than the 10% scenario. You only contributed for 6.8 pay periods. 6.8 x $400 = $2,720. Now you missed out on $7,680 of match.

Some plans allow a one time match after you get to $17,500 to true things up. This is a great feature that my plan does not have.

Most also require you to withhold at a whole percentage, so hitting the ideal rate (6.73% in this example) is not possible.

Introduce a bonus into all of this and it gets even squirellier. You do not want to withhold 401k from a big bonus because you lose out on a full match opportunity.

To calculate the ideal rate to contribute to max your 401k ($18,000 in 2015) and max your match:

$18,000 / # pay periods = what you should contribute each paycheck. This will result in $18,000 that you contribute and max match from employer. This might be a very large percentage of a lower paycheck, to the point that you cannot get there for some.

Tom

[scfr]

Not yet, but it is going to be close. I may hit the limit in late-December. My income was higher than expected this year because I worked a lot of OT, so I really can't complain. My income at my current job has always fluctuated quite a bit. With open enrollment coming up I need to decide if I want to keep my contribution % where it is or reduce it slightly. I'm very much undecided right now.

[scfr]

That's not how it works. Employers only match up to 4% of each pay period. If you contribute 25%, they don't match that, they just match up to 4% each pay period.

Right. The employer match is calculated as a percentage of income, not a percentage of employee contribution to the 401K.

[Like2Plan]

When I over contribute the excess is automatically taxed and added to my post tax 401k contributions. I try to limit this to as little as possible.

Are you allowed to make in service rollovers to a Roth account with the excess contributions (aka Mega Backdoor Roth)?

[Like2Plan]

Not yet, but it is going to be close. I may hit the limit in late-December. My income was higher than expected this year because I worked a lot of OT, so I really can't complain. My income at my current job has always fluctuated quite a bit. With open enrollment coming up I need to decide if I want to keep my contribution % where it is or reduce it slightly. I'm very much undecided right now.

Are you allowed to pick a dollar amount or does it have to be a percentage? Can you change your election amount during the year--or is it only done during the open enrollment? Gosh--if you aren't allowed to change that makes it pretty tricky to make an election.

[scfr]

Like2Plan - It is a percentage and we can only change the contribution % during the year if we experience a "major life event." So yes, it's a big once a year decision during open enrollment.

BUT ... I completely forgot that as a member of the 50+ crowd I'm allowed to contribute up to $23,000 so it will be fine. One advantage of getting older I guess.

[corn18]

Like2Plan - It is a percentage and we can only change the contribution % during the year if we experience a "major life event." So yes, it's a big once a year decision during open enrollment.

BUT ... I completely forgot that as a member of the 50+ crowd I'm allowed to contribute up to $23,000 so it will be fine. One advantage of getting older I guess.

Make sure you check with your plan administrator to see if the $6,000 one time catch up is taken out as a bulk $6k contribution at the end or if you can plan for the $24k to come out over the whole year. I am asking the same question in 2016. I am hoping I can just up my % and take it out over the whole year. Haven't asked the question yet.

[QuarterMillionMan]

Nice illustration tomhole. And Like2Plan your DH has a great employer matching up to 25%. I've heard of employers matching up to 6% max but that is rare and fortunate if you have an employer in such a case. And OTOH some employers don't offer any match (0% match). I'm grateful and appreciative to have an employer that provides a 4% match.

[Zedon]

Paycheck = $10,000, you contribute $673 (6.73%), employer matches $400 (4%). Your contribution = $17,500, employer match = $10,400. Total contribution = $27,900. This is your best case scenario. Contribute less than this rate and you miss out on maxing YOUR contribution. Contribute at higher than this rate and you lose employee match (see the next scenario).

Would this($27,900) not be a larger contribution than allowed in a 401k?

Just curious, I get paid once a month with no match so I don't have this problem unfortunately.

[doingitallwrong]

Would this($27,900) not be a larger contribution than allowed in a 401k?

The contribution limit only applies to employee deferrals, not to employer contributions.

[QuarterMillionMan]

Wait a minute I thought the $17,500 was the combined employee and employer contributions.