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Question about 401k max

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  • Question about 401k max

    So the 401k max is 16,500 but does that include company match and profit sharing? I am thinking of increasing my contribution but if it includes the match and profit sharing then I would be over contributing in which case what happens to my match for december? Does the company just stop contributing? Thats probably a better question for the company than it is for you..

  • #2
    The 16500 is your personal contribution limit. The match and any profit sharing that you may get is not included in that number.
    Brian

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    • #3
      bjl is correct, the $16500 limit is only your personal contributions. Up to $49,000 per year can be contributed in total to your 401k (your money plus company money). If that limit is a problem for you, please tell us all where you work, as that would be incredible matching. Note that there is also some weird formula, which I don't quite understand, that affects Highly Compensated Employees. If you make over $105,000 (if I recall correctly), there may be additional limits on your contributions based on participation in the plan by non-HCEs.

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      • #4
        You need to distinguish between income, your contributions, and employer contributions.

        For example your company pays you $165,000 and you decide to contribute 10% of your pay.
        You would contribute $16,500 of your own money (these are YOUR contributions).
        Your employer might match 3% of that, so another $4950 is added- this is a contribution, but it is an employer contribution.

        If you receive a BONUS, this is income, so more than likely 10% of the bonus is contributed (based on the percentage above) which means you max on YOUR contributions of $16,500 earlier in the year, and you might lose a small portion of that 5k match (if you had no December contributions from your income, you would lose the match for the 2-3 paychecks in December, which in this example is about $300 per pay period).

        If you receive profit sharing, is this a bonus, or just a straight employer contribution to the 401k? I cannot answer that from the information you gave. If the profit sharing is paid to you as income, then probably a portion of it counts to the $16,500 limit you have for your contributions. If the profit sharing is just a straight employer contribution to the 401k, then it is NOT income, and it will NOT show up as part of the $16,500 annual contribution.

        A good way to "verify" or give a common sense check is this:

        Does the profit sharing change your tax return? If the years with high profits show a higher income and AGI (and taxable income) on the tax return, my money has it that the $16,500 EMPLOYEE contribution has some profit sharing in it.

        The $16,500 is a limit for EMPLOYEE contributions. Employers have a different limit they can contribute on your behalf.

        Check here
        Publication 525 (2009), Taxable and Nontaxable Income

        and scroll to where you see this

        Includible compensation. This is the pay you received for the year from the employer who maintained the section 457 plan. It generally includes all the following payments.
        Wages and salaries.

        Fees for professional services.

        The value of any employer-provided qualified transportation fringe benefit (defined under Transportation, earlier) that is not included in your income.

        Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items.

        Commissions and tips.

        Fringe benefits.

        Bonuses.

        Employer contributions (elective deferrals) to:

        The section 457 plan.

        Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income.

        A salary reduction simplified employee pension (SARSEP).

        A tax-sheltered annuity (section 403(b) plan).

        A savings incentive match plan for employees (SIMPLE plan).

        A section 125 cafeteria plan.
        or this link

        Retirement Topics - Defined Contribution Plan (for example, 401(k), profit-sharing) Contribution Limits

        which includes this information

        Retirement Topics - Defined Contribution Plan (for example, 401(k), profit-sharing) Contribution Limits


        For 2010, a defined contribution plan's annual contributions and other additions (excluding earnings) paid to a participant’s account cannot exceed the lesser of:

        100% of the participant's compensation or

        $49,000
        Catch-up contributions are not subject to the above limit.

        Elective deferrals that an employee has chosen to contribute from his or her compensation to a 401(k), 403(b) or 457 plan are further limited to $16,500 in 2010 or 100% of his or her compensation, which ever is less, except for catch-up contributions.

        If an employee has elective salary reductions under any other employer’s plan, the total amount of the elective deferral contributions that an employee can make to all the plans he or she participates in is limited to $16,500 for 2010.

        Additional Resources:

        Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)

        Comment


        • #5
          Yes, you got your answer. "Profit sharing" is just another word for "employer contribution to retirement plan," in this scenario. Tax-wise, it is the same as a match, and is only limited by the $49k max per year.

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          • #6
            Sounds great. My contribution is 10% and my employer matches 6% and give an additional 6% which puts the entire fund at 16k. I really didn't want to lose out on the employer match by over contributing but it sounds like I am good to raise those contributions.

            Thanks!

            Comment


            • #7
              Minor follow-on question just for learning's sake:
              If, theoretically, Goldy WERE to accidentally over-contribute to her 401k, what would happen? Would she just be refunded her over-contributions (which would, obviously, be considered taxable income)? Would it negatively impact any of her employer match/profit-share, or have any other negative consequences (penalties)? Or is it simply not possible, and once she hits her maximum annual contribution of $16.5k, the spigot turns off and not a dollar more can be added by her?

              Comment


              • #8
                Originally posted by kork13 View Post
                Minor follow-on question just for learning's sake:
                If, theoretically, Goldy WERE to accidentally over-contribute to her 401k, what would happen? Would she just be refunded her over-contributions (which would, obviously, be considered taxable income)? Would it negatively impact any of her employer match/profit-share, or have any other negative consequences (penalties)? Or is it simply not possible, and once she hits her maximum annual contribution of $16.5k, the spigot turns off and not a dollar more can be added by her?
                Kork-

                two answers- who sends the money to the 401k plan?

                If its thru pay check elections, the employer should turn the spigot off once $16,500 is reached. Most of this is software driven, but regardless if there is over contribution it is on employee to solve the problem.

                If its thru a sole proprietorship where on Dec 31 $17,000 is sitting in the company account and the money is sent to 401k custodian, then the problem is different as the only one to blame was the person writing the check.

                10% penalty on earnings on excess contribution, plus taxes paid on excess, plus taxes paid when excess is withdrawn.

                The solution in both cases is this:

                401(k) Resource Guide - Plan Sponsors - Limitation on Elective Deferrals
                Treatment of excess deferrals. If the total of a plan participant’s elective deferrals is more than the limit, a plan participant can have the difference (called an excess deferral) returned to the participant from any of the plans that permit these distributions. A plan participant must notify the plan by April 15 of the following year of the amount to be paid from the plan. The plan must then pay the participant that amount plus allocable earnings by April 15 of the year following the year in which the excess occurred.

                Excess withdrawn by April 15. If a plan participant withdraws the excess deferral for 2010 by April 15, 2011, it is includable in the participant’s gross income for 2010, but not for 2011. However, any income earned on the excess deferral taken out is taxable in the tax year in which it is taken out. The distribution is not subject to the additional 10% tax on early distributions.

                Excess not withdrawn by April 15. If a plan participant does not take out the excess deferral by April 15, 2011, the excess, though taxable in 2010, is not included in the participant’s cost basis in figuring the taxable amount of any eventual distributions from the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.

                Comment


                • #9
                  I work with small employers and over-contributions happen all the time (by accident). In general, the employer will fix it. They'd return the money and adjust the payroll. Any errors would be found well before April 15th. Even if they had a payroll department that had no idea what they were doing, they have a retirement plan administrator to prevent these errors from happening. (They might not find it until after 12/31, but would fix it well before April 15th). Of course, anyone preparing a W-2 should know the 401k limits and fix anything that is amiss.

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                  • #10
                    What about investing in the 401k to the match, then utilizing 1st Roth then traditional IRAs, then back to the 401k if you have any "extra" money.

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