CNBC Ultimate Retirement Planning Guide 2020 question

[sblatner]

I was reading this article. It says under the part about Traditional 401k plans that there is a "lifetime contribution limit of $285,000". About halfway down in the article.

This is wrong, correct?

https://www.cnbc.com/guide/retirement-planning/

[disneysteve]

That is worded very poorly. The $285,000 isn't a limit of how much you can contribute. It's an income limit on being eligible to contribute. If you earn over 285K, you can no longer put money into your 401k for the year.

There is a different mistake on the graph (though it's correct in the text) about the 50+ contribution limit for a 401k. The graph says $26,500. It's actually $26,000.

[Like2Plan]

That is worded very poorly. The $285,000 isn't a limit of how much you can contribute. It's an income limit on being eligible to contribute. If you earn over 285K, you can no longer put money into your 401k for the year.

Just a slight clarification (and a good reason to be familiar with your plan rules)--I know this was mentioned on another thread (where the plan stops allowing any further contributions once the year to date salary reaches the annual limit), but according to the IRS web site this is not common:

"401(k) Plans - Deferrals and matching when compensation exceeds the annual limit

Unless your plan terms provide otherwise, the salary (elective) deferral limit is applied uniformly to the compensation that the employee receives throughout the year.

Compensation and contribution limits are subject to annual cost-of-living adjustments. The annual limits are:

• salary deferrals - $19,500 in 2020 ($19,000 in 2019), plus $6,500 in 2020 ($6,000 in 2015 - 2019) if the employee is age 50 or older (IRC Sections 402(g) and 414(v))
• annual compensation - $285,000 in 2020, $280,000 in 2019 (IRC Section 401(a)(17))
• total employee and employer contributions (including forfeitures) - the lesser of 100% of an employee’s compensation or $57,000 for 2020 ($56,000 for 2019 not including "catch-up" elective deferrals of $6,500 in 2020 ($6,000 in 2015 - 2019) for employees age 50 or older) (IRC section 415(c))

Example: Mary, age 49, whose annual compensation is $360,000 ($30,000 per month), elects to defer $1,500 per calendar month, up to $19,000 for the 2019 year. Mary may contribute to the plan until she reaches her annual deferral limit of $19,000 even though her compensation will exceed the annual limit of $280,000 in October.

Employer matching contributions

If your plan provides for matching contributions, you must follow the plan’s match formula.

Example: Your plan requires a match of 50% on salary deferrals that do not exceed 5% of compensation. Although Mary earned $360,000, your plan can only use up to $280,000 of her compensation when applying the matching formula for 2019. Mary’s matching contribution would be $7,000 (50% x (5% x $280,000)). Although Mary makes salary deferrals of $19,000, only $14,000 (5% of $280,000) will be matched. She must receive a matching contribution of $7,000 (50% x $14,000) under the terms of the plan.

What does your plan say?

Although not common, a plan can specifically require that salary deferrals cease once a participant’s compensation reaches the annual limit.

If your plan specifies that salary deferrals be based on a participant’s first $280,000 of compensation, then you must stop allowing Mary to make salary deferrals when her year-to-date compensation reaches $280,000, even though she hasn’t reached the annual $19,000 limit on salary deferrals, and must base the employer match on her actual deferrals."
(It says Page Last Reviewed or Updated: 12-Nov-2019--so that is why the limits were not all updated)

https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit

[disneysteve]

Thanks for clarifying that L2P.

[sblatner]

Got it. Thanks. I didn't know there was an income limit as I thought the only limit would be the $19k. Makes sense though.

[myrdale]

If you earn over 285K, you can no longer put money into your 401k for the year.

Wow I didn't know this. That really sucks. I am along way from this being an issue for me. But all the same, when I consider company owners who employee dozens or hundreds of people and contribute to their plans, but they are locked out of contributed for themselves!

Or is that the case that you can contribute each year, until you hit the $285k mark?

If you're earning that much per year, $23,750 per month, you "should be" hitting the $19,000 max easy.

[Like2Plan]

Or is that the case that you can contribute each year, until you hit the $285k mark?

As per the IRS links above, it is governed by plan rules. There are some plans (which the IRS web site says is rare) that allow contributions until your income reaches the 285k mark and then does not allow anymore. But, there are other plans that allow you to continue to contribute up to the maximum allowed by law spread out over the year even after you have reached the 285k income level.

[LivingAlmostLarge]

As per the IRS links above, it is governed by plan rules. There are some plans (which the IRS web site says is rare) that allow contributions until your income reaches the 285k mark and then does not allow anymore. But, there are other plans that allow you to continue to contribute up to the maximum allowed by law spread out over the year even after you have reached the 285k income level.

This plus it depends on plan for what counts. A lot of plans count only base salary to bonuses don't count to the number. Also doesn't count for our 50% match up to 7% of base salary. Big difference for us. I went back and checked and we were trued up because we maxed out the contributions by june. But only on base salary.

[myrdale]

Never mind the actual content of the article, if you take a minute to examine the image at the top of the article, it appears as though the people are taking money out of their wheel barrow labeled 401K and putting it into some random jar. As silly of a thing as this is I am curious how many other people are going to look at the image and think the same. While having dinner with a friend this past week he was telling me how excited he was to be taking money out of his 401K to pay off his truck. I struggled to not yell NO, and just said I didn't recommend it, but he'd have to do the math for himself.

[disneysteve]

While having dinner with a friend this past week he was telling me how excited he was to be taking money out of his 401K to pay off his truck. I struggled to not yell NO, and just said I didn't recommend it, but he'd have to do the math for himself.

Making it so easy to borrow from 401k plans is one of the biggest mistakes they ever made.

[LivingAlmostLarge]

Making it so easy to borrow from 401k plans is one of the biggest mistakes they ever made.

This is probably why defined benefit programs were superior. I still think we haven't seen people trying to retire en masse without a defined benefit plan. 1980s was when it was introduced. I would say only people who started working 1990s and later will really show how well it worked to have a 401k and retire solely based on your own contributions. I think that people haven't done that as a majority. Yes there are some and have always been some without but I think it wasn't widespread until the advent of the 401k.