Regular 401K vs Roth 401K

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xerxes101
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Regular 401K vs Roth 401K

Post by xerxes101 » Sun Nov 19, 2017 11:28 am

Hello All,

My company offers two types of 401K plans for employees, a regular one and a Roth one. The fund choices are the same for both. I am having a hard time deciding on my allocation for each. I reached out my max for regular 401K this year already in early November and I was thinking about switching to Roth once I reached the maximum contribution allowed by IRS. However, Vanguard who administers my company 401K told me that I can not contribute any more money to Roth 401K for this year because I had maxed out already. :?

How do I decide whether to allocate my contribution to regular 401K or Roth 401K for next year? Obviously income tax considerations play a role in that decision, but is there a general rule of thumb that people should follow? Also, I believe I can still put some money in a Roth IRA account I have outside of the company 401K plan.

Thanks

PFInterest
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Re: Regular 401K vs Roth 401K

Post by PFInterest » Sun Nov 19, 2017 11:40 am

yes you only get 18K total, not each (18.5K next year).

tax considerations are the only reason to choose one over the other. what is your tax bracket?

the vast majority of ppl should do t401k, and rIRA.

JW-Retired
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Re: Regular 401K vs Roth 401K

Post by JW-Retired » Sun Nov 19, 2017 11:46 am

xerxes101 wrote:
Sun Nov 19, 2017 11:28 am
..............is there a general rule of thumb that people should follow?
Yes. If you will be in a lower tax bracket in retirement then you want to defer taxes on your contributions. You will pay a lower tax rate later. If you expect a higher bracket in retirement then the more Roth the better. It's pretty hard to forecast so far ahead so many of us do a little of both (like PFInterest suggests).
JW
Retired at Last

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TinkerPDX
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Re: Regular 401K vs Roth 401K

Post by TinkerPDX » Sun Nov 19, 2017 11:49 am


ThrustVectoring
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Re: Regular 401K vs Roth 401K

Post by ThrustVectoring » Sun Nov 19, 2017 11:51 am

JW-Retired wrote:
Sun Nov 19, 2017 11:46 am
xerxes101 wrote:
Sun Nov 19, 2017 11:28 am
..............is there a general rule of thumb that people should follow?
Yes. If you will be in a lower tax bracket in retirement then you want to defer taxes on your contributions. You will pay a lower tax rate later. If you expect a higher bracket in retirement then the more Roth the better. It's pretty hard to forecast so far ahead so many of us do a little of both (like PFInterest suggests).
JW
Tax-deferred is also good if you expect to have any lower-income years before retirement, since you can pull the income forward for tax purposes at any time by doing a Roth conversion.

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FiveK
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Re: Regular 401K vs Roth 401K

Post by FiveK » Sun Nov 19, 2017 3:10 pm


MotoTrojan
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Re: Regular 401K vs Roth 401K

Post by MotoTrojan » Sun Nov 19, 2017 3:21 pm

Do Roth 401Ks allow $18K of after-tax money? If so, that allows more spending-power to be sheltered from taxes... shouldn't that offset the decision somewhat, for someone who can afford >$18K of after-tax saving?

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oldcomputerguy
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Re: Regular 401K vs Roth 401K

Post by oldcomputerguy » Sun Nov 19, 2017 3:26 pm

MotoTrojan wrote:
Sun Nov 19, 2017 3:21 pm
Do Roth 401Ks allow $18K of after-tax money?
According to the IRS, yes, the contribution limit is $18,000 ($24,000 if age 50 or older).
Anybody know why there's a 20-pound frozen turkey up in the light grid?

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FiveK
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Re: Regular 401K vs Roth 401K

Post by FiveK » Sun Nov 19, 2017 3:39 pm

MotoTrojan wrote:
Sun Nov 19, 2017 3:21 pm
Do Roth 401Ks allow $18K of after-tax money? If so, that allows more spending-power to be sheltered from taxes... shouldn't that offset the decision somewhat, for someone who can afford >$18K of after-tax saving?
It could matter somewhat, depending on what happens to the money "left over" after the traditional 401k is filled.

See https://www.bogleheads.org/wiki/Traditi ... t_accounts.

frankyo
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Re: Regular 401K vs Roth 401K

Post by frankyo » Sun Nov 19, 2017 4:00 pm

If you contributed the max to the regular 401K, you should be able to contribute after-tax in the same plan, if the plan allows it. Then at retirement, or if you leave your job, you should be able to roll the after-tax contributions into a Roth IRA. The max contribution before and after tax to a 401K is determined by the IRS yearly. As of 2013, the last year I contributed, the maximum amount was around $50,000. I would ask the plan administrator if after-tax contributions to the regular 401K are allowed, and what the max amount is nowdays.

MotoTrojan
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Re: Regular 401K vs Roth 401K

Post by MotoTrojan » Sun Nov 19, 2017 4:54 pm

FiveK wrote:
Sun Nov 19, 2017 3:39 pm
MotoTrojan wrote:
Sun Nov 19, 2017 3:21 pm
Do Roth 401Ks allow $18K of after-tax money? If so, that allows more spending-power to be sheltered from taxes... shouldn't that offset the decision somewhat, for someone who can afford >$18K of after-tax saving?
It could matter somewhat, depending on what happens to the money "left over" after the traditional 401k is filled.

See https://www.bogleheads.org/wiki/Traditi ... t_accounts.
Sweet. In my example, I assumed $18K of after-tax money is invested, so if you invested in the traditional 401k, your tax savings would then be invested in taxable. Assuming you were in the same tax-bracket in retirement, you'd be better off with the Roth. I guess I could see some scenarios where going from 28% to 25% after retirement, the Roth would still win.

xerxes101
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Re: Regular 401K vs Roth 401K

Post by xerxes101 » Sun Nov 19, 2017 5:09 pm

frankyo wrote:
Sun Nov 19, 2017 4:00 pm
If you contributed the max to the regular 401K, you should be able to contribute after-tax in the same plan, if the plan allows it. Then at retirement, or if you leave your job, you should be able to roll the after-tax contributions into a Roth IRA. The max contribution before and after tax to a 401K is determined by the IRS yearly. As of 2013, the last year I contributed, the maximum amount was around $50,000. I would ask the plan administrator if after-tax contributions to the regular 401K are allowed, and what the max amount is nowdays.
No, the problem is my plan apparently does not allow it which seems kind of odd to me, because I believe I am eligible to contribute to Traditional Roth IRA after I max out my regular 401K which then begs the question why not Roth 401K?

xerxes101
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Re: Regular 401K vs Roth 401K

Post by xerxes101 » Sun Nov 19, 2017 5:12 pm

frankyo wrote:
Sun Nov 19, 2017 4:00 pm
If you contributed the max to the regular 401K, you should be able to contribute after-tax in the same plan, if the plan allows it. Then at retirement, or if you leave your job, you should be able to roll the after-tax contributions into a Roth IRA. The max contribution before and after tax to a 401K is determined by the IRS yearly. As of 2013, the last year I contributed, the maximum amount was around $50,000. I would ask the plan administrator if after-tax contributions to the regular 401K are allowed, and what the max amount is nowdays.
So I understand the max 401K contribution for 2017 is 18000 + 6000 catch up if over 50, I am curious how did you get to contribute 50K? :shock:

nolesrule
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Re: Regular 401K vs Roth 401K

Post by nolesrule » Sun Nov 19, 2017 5:14 pm

After-tax contributions and Roth contributions are not the same thing. Roth 401k employee contributions and Traditional 401k employee contributions are subject to a total shared contribution limit of $18000.

Some plans allow after-tax contributions which can go beyond the $18k limit. Earnings are subject to taxation upon Roth conversion or upon withdrawal. So they are not the same as Roth contributions. There are additional rules regarding those limits and treatment.

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FiveK
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Re: Regular 401K vs Roth 401K

Post by FiveK » Sun Nov 19, 2017 5:27 pm

MotoTrojan wrote:
Sun Nov 19, 2017 4:54 pm
Sweet. In my example, I assumed $18K of after-tax money is invested, so if you invested in the traditional 401k, your tax savings would then be invested in taxable. Assuming you were in the same tax-bracket in retirement, you'd be better off with the Roth. I guess I could see some scenarios where going from 28% to 25% after retirement, the Roth would still win.
Correct. Just be careful not to negate the assumption by putting too much in Roth, thereby causing the retirement marginal rate to decrease to the point traditional contributions would have been better. ;)

MotoTrojan
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Re: Regular 401K vs Roth 401K

Post by MotoTrojan » Sun Nov 19, 2017 5:48 pm

FiveK wrote:
Sun Nov 19, 2017 5:27 pm
MotoTrojan wrote:
Sun Nov 19, 2017 4:54 pm
Sweet. In my example, I assumed $18K of after-tax money is invested, so if you invested in the traditional 401k, your tax savings would then be invested in taxable. Assuming you were in the same tax-bracket in retirement, you'd be better off with the Roth. I guess I could see some scenarios where going from 28% to 25% after retirement, the Roth would still win.
Correct. Just be careful not to negate the assumption by putting too much in Roth, thereby causing the retirement marginal rate to decrease to the point traditional contributions would have been better. ;)
Of course. I am not sure where I will be in retirement honestly, but I am currently in the 28% bracket and young. Have only been investing in my Roth, as my current employer doesn't have a 401k. One is coming though, so initially at-least I'll likely go with traditional IRA and max it out, along with my Roth, as it would be tough to max out a Roth 401K and IRA for me at the moment. Any extra savings will go to my taxable.

frankyo
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Re: Regular 401K vs Roth 401K

Post by frankyo » Sun Nov 19, 2017 6:18 pm

xerxes101 wrote:
Sun Nov 19, 2017 5:12 pm
frankyo wrote:
Sun Nov 19, 2017 4:00 pm
If you contributed the max to the regular 401K, you should be able to contribute after-tax in the same plan, if the plan allows it. Then at retirement, or if you leave your job, you should be able to roll the after-tax contributions into a Roth IRA. The max contribution before and after tax to a 401K is determined by the IRS yearly. As of 2013, the last year I contributed, the maximum amount was around $50,000. I would ask the plan administrator if after-tax contributions to the regular 401K are allowed, and what the max amount is nowdays.
So I understand the max 401K contribution for 2017 is 18000 + 6000 catch up if over 50, I am curious how did you get to contribute 50K? :shock:
The 18000 or 18000+6000 if over 50, is for the maximum contribution that is substracted from your taxable income so you would save in taxes for that amount during the year. However, in my plan, after the 24000 before-tax contribution, I was able to contribute around 26000 more as after-tax contribution (a total of around 50000 max contribution to the plan set by the IRS. Not many people know this). Since the 26000 had already paid taxes, I was able to roll the after-tax contributions to a Roth IRA when I retired. I didn't contribute the full 26000 for several years, but I could have if I wanted. Are you sure you cannot contribute after-tax money to the regular 401K plan? Please ask the plan administrator.

frankyo
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Re: Regular 401K vs Roth 401K

Post by frankyo » Sun Nov 19, 2017 6:29 pm

nolesrule wrote:
Sun Nov 19, 2017 5:14 pm
After-tax contributions and Roth contributions are not the same thing. Roth 401k employee contributions and Traditional 401k employee contributions are subject to a total shared contribution limit of $18000.

Some plans allow after-tax contributions which can go beyond the $18k limit. Earnings are subject to taxation upon Roth conversion or upon withdrawal. So they are not the same as Roth contributions. There are additional rules regarding those limits and treatment.
You are correct, Earnings will have to pay taxes, but the original after-tax contributions can be rolled into a ROTH IRA without paying any taxes because they had already paid taxes. This is a nice way to create a ROTH IRA at retirement or when you switch jobs without being subject to the yearly ROTH IRA contribution limits. As a matter if fact, while I was working, besides the after-tax contributions to the traditional 401K plan, I was able to contribute to a ROTH IRA, based on the limits.

xerxes101
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Re: Regular 401K vs Roth 401K

Post by xerxes101 » Sun Nov 19, 2017 9:42 pm

0
[/quote]

The 18000 or 18000+6000 if over 50, is for the maximum contribution that is substracted from your taxable income so you would save in taxes for that amount during the year. However, in my plan, after the 24000 before-tax contribution, I was able to contribute around 26000 more as after-tax contribution (a total of around 50000 max contribution to the plan set by the IRS. Not many people know this). Since the 26000 had already paid taxes, I was able to roll the after-tax contributions to a Roth IRA when I retired. I didn't contribute the full 26000 for several years, but I could have if I wanted. Are you sure you cannot contribute after-tax money to the regular 401K plan? Please ask the plan administrator.
[/quote]

it is great that you could do that. It is a shame to see that the employer in my case is dictating how the employees should invest their money. I don't get exactly why they would want to limit their employees.

xerxes101
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Re: Regular 401K vs Roth 401K

Post by xerxes101 » Sun Nov 19, 2017 9:47 pm

After some research online, Morningstar has this worksheet which I believe is useful:

http://www.morningstar.com/finance/PDF/ ... -hRpdPXCfd

xerxes101
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Re: Regular 401K vs Roth 401K

Post by xerxes101 » Sun Nov 19, 2017 9:52 pm

xerxes101 wrote:
Sun Nov 19, 2017 9:47 pm
After some research online, Morningstar has this worksheet which I believe is useful:

http://www.morningstar.com/finance/PDF/ ... -hRpdPXCfd
Sorry for the dead link...maybe this one works?

https://www.google.com/url?sa=t&rct=j&s ... -hRpdPXCfd

nolesrule
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Re: Regular 401K vs Roth 401K

Post by nolesrule » Sun Nov 19, 2017 9:55 pm

xerxes101 wrote:
Sun Nov 19, 2017 9:42 pm


it is great that you could do that. It is a shame to see that the employer in my case is dictating how the employees should invest their money. I don't get exactly why they would want to limit their employees.
Many, probably most, 401k plans do not allow after tax contributions, not just yours. I've never had the option of after-tax contributions with 4 different employers.

xerxes101
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Re: Regular 401K vs Roth 401K

Post by xerxes101 » Mon Nov 20, 2017 9:34 pm

nolesrule wrote:
Sun Nov 19, 2017 9:55 pm
xerxes101 wrote:
Sun Nov 19, 2017 9:42 pm


it is great that you could do that. It is a shame to see that the employer in my case is dictating how the employees should invest their money. I don't get exactly why they would want to limit their employees.
Many, probably most, 401k plans do not allow after tax contributions, not just yours. I've never had the option of after-tax contributions with 4 different employers.
My employer actually has a Roth 401k set up for the employees, but for reasons unclear to me constitutes that if an employee maxes out his regular 401K, then he can no longer contribute to Roth 401K!

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FiveK
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Re: Regular 401K vs Roth 401K

Post by FiveK » Mon Nov 20, 2017 11:02 pm

xerxes101 wrote:
Mon Nov 20, 2017 9:34 pm
My employer actually has a Roth 401k set up for the employees, but for reasons unclear to me constitutes that if an employee maxes out his regular 401K, then he can no longer contribute to Roth 401K!
That would be because the employer does not want to break the law. ;)

There is such a thing as an "after tax, non-Roth" 401k option. See https://www.bogleheads.org/wiki/After-tax_401(k).

xerxes101
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Re: Regular 401K vs Roth 401K

Post by xerxes101 » Mon Nov 20, 2017 11:54 pm

Based on what the link says:

"Traditional and Roth accounts share a employee contribution limit up to $18,000 per person for 2016 and $18,500 for 2018. However, Section 415(c)(1)(A) limits total contributions to defined contribution plans to $54,000 in 2016 and $55,000 in 2018.[2] The limit for an after-tax 401(k) is the difference between the amount already contributed by the employer and employee, and the Section 415 limit."

Based on the above, my understanding is that after I maxed out my regular 401K contribution at 18,000 for this year, I should have still been allowed to contribute an additional 55,000-18,000 = 37,000 dollars to the Roth 401K. But the 401K administrator did not allow me to do it!

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FiveK
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Re: Regular 401K vs Roth 401K

Post by FiveK » Tue Nov 21, 2017 12:14 am

xerxes101 wrote:
Mon Nov 20, 2017 11:54 pm
Based on what the link says:

"Traditional and Roth accounts share a employee contribution limit up to $18,000 per person for 2016 and $18,500 for 2018. However, Section 415(c)(1)(A) limits total contributions to defined contribution plans to $54,000 in 2016 and $55,000 in 2018.[2] The limit for an after-tax 401(k) is the difference between the amount already contributed by the employer and employee, and the Section 415 limit."

Based on the above, my understanding is that after I maxed out my regular 401K contribution at 18,000 for this year, I should have still been allowed to contribute an additional 55,000-18,000 = 37,000 dollars to the Roth 401K. But the 401K administrator did not allow me to do it!
Where it says "share an employee contribution limit" it means the total contributions to traditional and Roth combined cannot exceed $18K.

Pigeye Brewster
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Re: Regular 401K vs Roth 401K

Post by Pigeye Brewster » Tue Nov 21, 2017 9:38 am

FiveK wrote:
Tue Nov 21, 2017 12:14 am
xerxes101 wrote:
Mon Nov 20, 2017 11:54 pm
Based on what the link says:

"Traditional and Roth accounts share a employee contribution limit up to $18,000 per person for 2016 and $18,500 for 2018. However, Section 415(c)(1)(A) limits total contributions to defined contribution plans to $54,000 in 2016 and $55,000 in 2018.[2] The limit for an after-tax 401(k) is the difference between the amount already contributed by the employer and employee, and the Section 415 limit."

Based on the above, my understanding is that after I maxed out my regular 401K contribution at 18,000 for this year, I should have still been allowed to contribute an additional 55,000-18,000 = 37,000 dollars to the Roth 401K. But the 401K administrator did not allow me to do it!
Where it says "share an employee contribution limit" it means the total contributions to traditional and Roth combined cannot exceed $18K.
OP, there is a subtle but distinct difference between Roth 401(k) contributions and after-tax 401(k) contributions, i.e. all Roth are after-tax but not all after-tax are Roth. As FiveK notes, Roth is subject to the current $18k limit and that limit applies to the total amount of pre-tax traditional and Roth. The non-Roth after-tax variety is the type subject to the current overall defined contribution $54k limit.

If your plan allows for in-service distribution of the non-Roth after-tax (not all do), you can convert those contributions to Roth and the gains will be tax-free upon withdrawal. That is what makes after-tax contributions desirable. Not being able to do the in-service to Roth limits the effectiveness as any gains then will be taxed as ordinary income at some point when they are withdrawn.

nolesrule
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Re: Regular 401K vs Roth 401K

Post by nolesrule » Tue Nov 21, 2017 5:53 pm

And when I said above that in the 4 different 401k plans I've been apart of I've never had the ability to make after-tax contributions, I was referring to non-Roth after-tax contributions. Generally when we refer to Roth we mean Roth, and when we refer to after-tax, we mean non-Roth after-tax.

As far as I can tell, most plans established since the creation of Roth 401k accounts don't allow non-Roth after-tax contributions, either because the plan sponsors don't know about them, or don't want to pay the administrative costs involved.

xerxes101
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Re: Regular 401K vs Roth 401K

Post by xerxes101 » Tue Nov 21, 2017 10:20 pm

Pigeye Brewster wrote:
Tue Nov 21, 2017 9:38 am
FiveK wrote:
Tue Nov 21, 2017 12:14 am
xerxes101 wrote:
Mon Nov 20, 2017 11:54 pm
Based on what the link says:

"Traditional and Roth accounts share a employee contribution limit up to $18,000 per person for 2016 and $18,500 for 2018. However, Section 415(c)(1)(A) limits total contributions to defined contribution plans to $54,000 in 2016 and $55,000 in 2018.[2] The limit for an after-tax 401(k) is the difference between the amount already contributed by the employer and employee, and the Section 415 limit."

Based on the above, my understanding is that after I maxed out my regular 401K contribution at 18,000 for this year, I should have still been allowed to contribute an additional 55,000-18,000 = 37,000 dollars to the Roth 401K. But the 401K administrator did not allow me to do it!
Where it says "share an employee contribution limit" it means the total contributions to traditional and Roth combined cannot exceed $18K.
OP, there is a subtle but distinct difference between Roth 401(k) contributions and after-tax 401(k) contributions, i.e. all Roth are after-tax but not all after-tax are Roth. As FiveK notes, Roth is subject to the current $18k limit and that limit applies to the total amount of pre-tax traditional and Roth. The non-Roth after-tax variety is the type subject to the current overall defined contribution $54k limit.

If your plan allows for in-service distribution of the non-Roth after-tax (not all do), you can convert those contributions to Roth and the gains will be tax-free upon withdrawal. That is what makes after-tax contributions desirable. Not being able to do the in-service to Roth limits the effectiveness as any gains then will be taxed as ordinary income at some point when they are withdrawn.
OK thanks for the clarification, here is what I am confused about:

If what FiveK notes is true and IRS has set the limit at 18,000 (I have no reason to believe it is not true BTW), then my employer is potentially in violation of the IRS rule, because I contributed 18,000 to the 401K throughout the year, the fund administrator accepted my contributions, and then the employer contributed another 4% (matching contribution). Therefore, the total exceeds 18,000! (I know my employer is smarter than that! Could you please explain this inconsistency?

gostars
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Re: Regular 401K vs Roth 401K

Post by gostars » Tue Nov 21, 2017 10:26 pm

$18000 is your personal contribution limit across all 401k and similar plans for 2017. $54000 is the total combined per-employer for 2017. So if you have one employer, you can contribute 18000 and they can contribute up to 36000.

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FiveK
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Re: Regular 401K vs Roth 401K

Post by FiveK » Tue Nov 21, 2017 10:36 pm

xerxes101 wrote:
Tue Nov 21, 2017 10:20 pm
If what FiveK notes is true and IRS has set the limit at 18,000 (I have no reason to believe it is not true BTW), then my employer is potentially in violation of the IRS rule, because I contributed 18,000 to the 401K throughout the year, the fund administrator accepted my contributions, and then the employer contributed another 4% (matching contribution). Therefore, the total exceeds 18,000! (I know my employer is smarter than that! Could you please explain this inconsistency?
No inconsistency, just a matter of defining terms.

Within a 401k there can be three types of "sub-accounts":
1) Pre-tax (aka traditional)
2) Roth
3) non-Roth after tax

There is an $18K limit on an individual's voluntary contributions to #1 and #2 combined.

There is a $54K limit on (individual + employer) contributions to #1, #2 and #3 combined (and the employer match cannot go to #2).

A 401k plan may, but is not required to, have all 3 sub-account types.

ETA: See http://beta.morningstar.com/articles/68 ... -401k.html for another way of explaining this.

xerxes101
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Re: Regular 401K vs Roth 401K

Post by xerxes101 » Thu Nov 23, 2017 9:09 am

FiveK wrote:
Tue Nov 21, 2017 10:36 pm
xerxes101 wrote:
Tue Nov 21, 2017 10:20 pm
If what FiveK notes is true and IRS has set the limit at 18,000 (I have no reason to believe it is not true BTW), then my employer is potentially in violation of the IRS rule, because I contributed 18,000 to the 401K throughout the year, the fund administrator accepted my contributions, and then the employer contributed another 4% (matching contribution). Therefore, the total exceeds 18,000! (I know my employer is smarter than that! Could you please explain this inconsistency?
No inconsistency, just a matter of defining terms.

Within a 401k there can be three types of "sub-accounts":
1) Pre-tax (aka traditional)
2) Roth
3) non-Roth after tax

There is an $18K limit on an individual's voluntary contributions to #1 and #2 combined.

There is a $54K limit on (individual + employer) contributions to #1, #2 and #3 combined (and the employer match cannot go to #2).

A 401k plan may, but is not required to, have all 3 sub-account types.

ETA: See http://beta.morningstar.com/articles/68 ... -401k.html for another way of explaining this.
Thank you FiveK and all others who clarified this for me. I also found another Morningstart link with useful info.:
http://beta.morningstar.com/articles/81 ... r-you.html

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