401k Overcontribution

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Topic Author
davidlukewilcox
Posts: 117
Joined: Sat Dec 24, 2011 1:44 am

401k Overcontribution

Post by davidlukewilcox »

My wife got laid off shortly ago. Her 401k did not match at all. Nonetheless, we had already contributed the legal maximum for the year. She has contributed 17,500 into that 401k this year. After she got laid off, we rolled this 401k over to Vanguard almost immediately.

She's found a new job, and the new job offers a matching 401k (75% up to 6% of salary). I'm wondering if there's anything we can or should do with respect to this. If she contributes and doesn't change anything else, we'll be subject to an overcontribution fee. Is there a way we can restate some of her already-made contributions as income so that we can contribute the 6% that this job gives us without a fee? How bad would the fee be? Would it really be 75% of the value of assets contributed? With such a generous match, it makes me want to get the match anyway regardless of what the fee is. I read somewhere else that the fee is 6% of the overcontribution, but that could be wrong.

What options do we have?
livesoft
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Re: 401k Overcontribution

Post by livesoft »

I'm bumping this up because your questions seem to be all over the place with hints of misinformation.

The 6% excise tax applies to IRAs and not to 401(k)s.

I think that ....
Any excess deferrals to a 401(k) would be taxed in the year you contributed them and (unless corrected before April 15th of following year) they would be taxed again in the year you withdrew them. After that April 15th, there could be an early withdrawal penalty of 10% unless one met the age requirement, so probably one wouldn't want to do that and would just leave it in there to be taxed again when withdrawn later. The 401(k) plan could fail some tests and become disqualified, but with 2 employers how would those employers even know?

That's a pretty stiff consequence, so I would suggest that you do not contribute anymore to the 401(k) plan until next year.

Basically, your spouse will get two W-2s that will show the amounts contributed to 401(k) plans. The IRS will easily see the excess deferral and expect it to be included as income on your Form 1040 for 2013.
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JamesSFO
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Re: 401k Overcontribution

Post by JamesSFO »

BTW, had you not rolled the 401K to Vanguard, you might have been able to get the old employer to unwind some of the contributions. As it is now, livesoft is right, move on to 2014.
Oilburner
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Re: 401k Overcontribution

Post by Oilburner »

You and your wife won't miss out on much. Since matches are by pay period, the forgone match will be about 2/12 X 0.75 X 0.06 of her salary. This represents November and December. Let's say she was hired at 100,000 per year. The forgone amount would be $750.
BW1985
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Re: 401k Overcontribution

Post by BW1985 »

I had this same concern since my contribution % to hit exactly $17,500 is based on my salary before my raise, so had I not changed the contribution % I would have overcontributed. I asked my employer if they have anything in place to prevent over contributions and their response was no, anything above 17,500 will be contributed as after-tax. So I asked why not just prevent that and not make the contribution since the whole purpose of a 401k is for contributing pre-tax money? Their response was that they allow after tax contributions because some people like to do that. :confused If you want to contribute after tax money that will be taxed again at time of withdrawl why wouldn't you just put the money in a taxable account at a brokerage instead of in your employers 401k?
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niceguy7376
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Re: 401k Overcontribution

Post by niceguy7376 »

Use the flat amount method vs the % method in contributions.
Then a pay hike will not change the total yearly contributions.
placeholder
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Re: 401k Overcontribution

Post by placeholder »

My company allows aftertax contributions and matches them. Look into that.
BW1985
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Re: 401k Overcontribution

Post by BW1985 »

niceguy7376 wrote:Use the flat amount method vs the % method in contributions.
Then a pay hike will not change the total yearly contributions.
I didn't see that as an option but will look for it. Thank you
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Topic Author
davidlukewilcox
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Joined: Sat Dec 24, 2011 1:44 am

Re: 401k Overcontribution

Post by davidlukewilcox »

Just to be clear, these after tax contributions are not roth? And they do not count toward the 17,500 limit? Does anyone have any IRS pages where I can read more about these? Does the employer match count toward the 17,500 limit?
ciscovp
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Re: 401k Overcontribution

Post by ciscovp »

davidlukewilcox wrote:Just to be clear, these after tax contributions are not roth? And they do not count toward the 17,500 limit? Does anyone have any IRS pages where I can read more about these? Does the employer match count toward the 17,500 limit?
I believe you can only add after-tax contributions after you reach the $17500 limit.

In your case, you have to wait until 2014.

As previously mentioned, rolling over the old 401k has limited your options.
nimo956
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Re: 401k Overcontribution

Post by nimo956 »

BW1985 wrote:I had this same concern since my contribution % to hit exactly $17,500 is based on my salary before my raise, so had I not changed the contribution % I would have overcontributed. I asked my employer if they have anything in place to prevent over contributions and their response was no, anything above 17,500 will be contributed as after-tax. So I asked why not just prevent that and not make the contribution since the whole purpose of a 401k is for contributing pre-tax money? Their response was that they allow after tax contributions because some people like to do that. :confused If you want to contribute after tax money that will be taxed again at time of withdrawl why wouldn't you just put the money in a taxable account at a brokerage instead of in your employers 401k?
People do this because you can usually withdraw this money a few times a year and put it into a Roth IRA, paying tax only on the gains. This allows you to greatly exceed the $5.5k contribution limit for a typical Roth (by up to $33.5k per year if there's no company match).
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terabitdan
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Re: 401k Overcontribution

Post by terabitdan »

In my plan both after tax ROTH and after tax is allowed. The after-tax contribution can be withdrawn at anytime tax free. Growth is taxed if withdrawn.

We also make an election of what happens when we hit the limit, stop contributions or convert to after tax.

The more I see of others plans the better mine looks!

Dan
Topic Author
davidlukewilcox
Posts: 117
Joined: Sat Dec 24, 2011 1:44 am

Re: 401k Overcontribution

Post by davidlukewilcox »

ciscovp wrote: I believe you can only add after-tax contributions after you reach the $17500 limit.

In your case, you have to wait until 2014.

As previously mentioned, rolling over the old 401k has limited your options.
I'm confused about this. If I'm allowed to contribute after-tax contributions after the $17,500 limit, then I don't see why I can't just do this. I don't see why I have to wait until 2014. Why can't I make after-tax contributions during 2013, and then switch to pre-tax for 2014?

Thanks.
Last edited by davidlukewilcox on Thu Oct 31, 2013 4:48 pm, edited 1 time in total.
livesoft
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Re: 401k Overcontribution

Post by livesoft »

401(k) plans are mostly all different. My 401(k) plan does not allow after tax contributions. Your spouse's plan may not allow after-tax contribution and if they did, they would not necessarily know that her contributions were meant to be after-tax since they should know nothing about her contributions with her previous employer. But perhaps you all can sit down with the very knowledgeable benefits folks at her new employer and discuss all this with them?

Employer match does not count towards $17,500 employee-contribution-limit (for under age 50 folks).
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placeholder
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Re: 401k Overcontribution

Post by placeholder »

ciscovp wrote:I believe you can only add after-tax contributions after you reach the $17500 limit.
Why do you believe that?
placeholder
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Re: 401k Overcontribution

Post by placeholder »

livesoft wrote:Your spouse's plan may not allow after-tax contribution and if they did, they would not necessarily know that her contributions were meant to be after-tax since they should know nothing about her contributions with her previous employer.
At my company you tell them whether contributions are after-tax or before.
Tamahome
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Re: 401k Overcontribution

Post by Tamahome »

Talk to the new company. Our firm has a go-to guy that we can call on to answer questions. He is great, as he tells us what people can and can not do under our plan. Her company likely has the same. That person will best be able to answer whether or not there are options under that plan. It never hurts to ask. (Although, from what I understand from talking to our guy about this issue when we thought it might be a problem for someone, over paying into the 401k is such a no-no that she would really rather wait.)
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
ciscovp
Posts: 125
Joined: Wed Apr 30, 2008 10:02 pm

Re: 401k Overcontribution

Post by ciscovp »

placeholder wrote:
livesoft wrote:Your spouse's plan may not allow after-tax contribution and if they did, they would not necessarily know that her contributions were meant to be after-tax since they should know nothing about her contributions with her previous employer.
At my company you tell them whether contributions are after-tax or before.

Are you confusing Roth 401k with after-tax contributions?
ciscovp
Posts: 125
Joined: Wed Apr 30, 2008 10:02 pm

Re: 401k Overcontribution

Post by ciscovp »

davidlukewilcox wrote:
ciscovp wrote: I believe you can only add after-tax contributions after you reach the $17500 limit.

In your case, you have to wait until 2014.

As previously mentioned, rolling over the old 401k has limited your options.
I'm confused about this. If I'm allowed to contribute after-tax contributions after the $17,500 limit, then I don't see why I can't just do this. I don't see why I have to wait until 2014. Why can't I make after-tax contributions during 2013, and then switch to pre-tax for 2014?

Thanks.
Talk to the 401k administrator. Let's see what they have to say.
placeholder
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Re: 401k Overcontribution

Post by placeholder »

ciscovp wrote:Are you confusing Roth 401k with after-tax contributions?
No, why do you ask? Roth isn't even available.
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