how to max 401(k) mechanics question

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how to max 401(k) mechanics question

Postby beachmom » Thu May 23, 2013 5:59 am

Hi
I am receiving a lump sum. I want to Max my 401k contribution and use some of my lump sum as living expenses as a way to move some of the lump sum into a tax deferred account.
How do I do that without going over? I can only designate my contribution amount as a percentage of pay. I can only change my percentage once a quarter. I am part time and paid an hourly rate. I work at least 30 hours per week but the additional hours are unpredictable.
My human resources person does not know what happens if you go over. (Small company) Am I correct in that the employer contribution counts toward the $17500 limit?


Thanks for help. I know many of you Max every year but it is new to me and probably a one time thing. My usual contribution is 12% and I will be going to nearly 100% since my income is relatively low.
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Re: how to max 401(k) mechanics question

Postby dailybagel » Thu May 23, 2013 6:10 am

My understanding is that employer contributions do not count towards the limit.
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Re: how to max 401(k) mechanics question

Postby Oilburner » Thu May 23, 2013 7:08 am

Correct. The employer match does not count towards the employee contribution limit set by the IRS. Also, employer match contributions are usually based on a per pay period and are calculated based on your participation rate for that pay period. So if you contribute too much early in the year and reach the 17500 limit, you can not contribute for the remainder of the year and you will forgo the employer match for those pay periods (I found out the hard way. Learn from my mistake)

I can only speak how my (3-person) employer handled excess employee 401k contributions, since I went over one year. Paychex was the payroll processor and once I reached the limit, they stopped my contributions. But if for some reason your employer lets you contribute too much, you have to file with the IRS to correct the error. I am not sure about those details.
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Re: how to max 401(k) mechanics question

Postby gtaylor » Thu May 23, 2013 2:25 pm

Some of this presupposes that the OP's plan does not include a top-up employer match contribution the following Spring. Such top-ups aren't uncommon, it just needs to be clarified here.

In general, assuming that you are contributing to just the one 401(k) plan this year, then the employer will make sure you don't go over the 17500 limit; you can just specify the max percentage possible for your contribution and that is that. It is routine to hit this limit mid-paycheck, and I'm quite sure the payroll computers will magically do the right thing, leaving you with precisely the limit contributed.

If the max percentage happens to result in a negative paycheck because the remaining dollars don't cover other deductions, that's slightly less usual. Paychex's computers probably do something reasonable, but who knows. I, for one, have carefully avoided this situation so I won't have to find out, mostly because our payroll, 401(k), and HR are completely outsourced to three different companies, making 401(k) snafus somewhat tedious to deal with.

If you do have a match and it is capped in such a way that you won't get the full amount without precisely match-sized contributions every paycheck, then you will also want the plan to provide the top-up after the calendar year feature. However if there is no top-up feature to your match, then there is nothing for it but to try and contribute evenly throughout the plan year. In such a plan it may be impossible to both contribute the max AND get the full match. (This is why top-ups are common).

On a more general lump sum topic, is your lump sum taxable? Did it get withheld from? There may be issues to clarify around that, and if a big tax is due there part of the answer might also involve payroll ju-jitsu -- withholding is temporally different from estimated tax payments.
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Re: how to max 401(k) mechanics question

Postby ofcmetz » Thu May 23, 2013 2:34 pm

I would estimate my pay for the year. Then I would figure out what percentage of that estimate that $17,500 is. I would then defer this percentage and evaluate each quarter while making any necessary adjustments. Then you can simply transfer an equal portion of what you defer each paycheck to your checking account from the cash lump sum for living expenses.

As others have posted, the employer match does not count towards your $17,500 limit.
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Re: how to max 401(k) mechanics question

Postby connya » Thu May 23, 2013 3:24 pm

From Pub 560:

Defined contribution plan. For 2012, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of the following amounts.


100% of the participant's compensation.


$50,000.


Does this mean that the employee's contribution PLUS the employer's match cannot exceed 100% of the employee's total compensation?

I don't know if companies allow employees to contribute 100% of their income, but if so, that is a limit which OP may butt up against.
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Re: how to max 401(k) mechanics question

Postby livesoft » Thu May 23, 2013 4:41 pm

Oilburner wrote:.... But if for some reason your employer lets you contribute too much, you have to file with the IRS to correct the error. I am not sure about those details.

You have to get your employer to correct the error and not the IRS. My spouse overcontributed in 2012 and it took awhile for the employer to correct the overcontribution correctly. Actually, thanks for the reminder, maybe they didn't correct it correctly yet. I will have to get my spouse to check.
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Re: how to max 401(k) mechanics question

Postby beachmom » Thu May 23, 2013 11:06 pm

Thanks for the help.
I did the math and realized I might not hit the Max even if I go with 100%. I can't change my contribution until July 1. Connya's comment is a concern but since I have only contributed 12 % of my pay so far the annual total won't be 100%. Negative paychecks after ss/ Medicare could be a problem.
I am not confident of my employer's ability to deal with an overage. HR told me today no one has ever maxed their contribution. It is a small young company.

I like the advice about writing myself a check every payday. I was a little worried how I would feel working and getting no immediate pay.

The lump sum is taxable but we have a large cost basis so I estimate my net taxable will be about $40000 to $50000. I will be calling my Cpa to see if we need to do anything like start quarterly tax payments.
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Re: how to max 401(k) mechanics question

Postby Default User BR » Fri May 24, 2013 1:37 pm

Things vary by employer. At MyMegaCorp, they allow after-tax non-Roth contributions. So if you hit the employee deferral limit, they switch to after-tax (matching continues) rather than cut it off.

This is a discussion for your plan administration.


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Re: how to max 401(k) mechanics question

Postby gtaylor » Fri May 24, 2013 3:06 pm

beachmom wrote:Thanks for the help.
I did the math and realized I might not hit the Max even if I go with 100%. I can't change my contribution until July 1. Connya's comment is a concern but since I have only contributed 12 % of my pay so far the annual total won't be 100%. Negative paychecks after ss/ Medicare could be a problem.
I am not confident of my employer's ability to deal with an overage. HR told me today no one has ever maxed their contribution. It is a small young company.

I really do think they would handle the 17500 limit gracefully; this is very common, and your employer is doubtless using the same payroll provider or software that everyone else does.

I like the advice about writing myself a check every payday. I was a little worried how I would feel working and getting no immediate pay.


Yes, it is an interesting state of affairs. But don't think that you are getting no immediate pay. Rather, your pay is just going into your savings account instead of your checking account. Proof positive that you aren't living paycheck to paycheck. Good!


The lump sum is taxable but we have a large cost basis so I estimate my net taxable will be about $40000 to $50000. I will be calling my Cpa to see if we need to do anything like start quarterly tax payments.


I hope he's better than the various CPAs I have been through. I finally gave up on the lot of them :(

If he says that you must immediately send in a bunch of estimated taxes, do tell. It's probably not the only option.

Do ask him if you will push yourself into AMT with this lump sum. I don't think we can tell from the data presented, but if this does happen to hit you with AMT, holy bananas do you want to max out the 401(k), and probably do a few other things to squeak back out of AMT range if you can.
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