Trying to understand my 401K

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Sagefemme
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Joined: Mon Mar 12, 2018 9:31 pm

Trying to understand my 401K

Post by Sagefemme » Sat Apr 14, 2018 1:52 am

I'm embarrassed to admit that I'm closely reading the Summary Plan Description for my employer's 401k plan for the first time. I've only been employed there since 1996 :? :? ........ I'm finding it a bit confusing. It is titled Summary Plan Description for XYZ Company, PC, Section 401k Profit Sharing Plan. The company match is discussed (briefly) but does not say how much it is. There is a much more detailed discussion of the profit sharing part, and how that is determined on an annual basis, description of non-discrimination tests, etc.

I want to understand how I can maximize retirement savings within this plan. I have contributed the maximum for years; now I want to do a catch-up contribution as well (I started another thread about this but now my questions are more specific). The salary reduction agreement asks for dollar amount per pay period I want to defer, whether I want deferrals taken from bonuses as well as regular salary, and finally whether I want my deferrals to go to regular 401K, to Roth 401K, or a percentage to each.

Does this mean I can start a Roth now (neither I nor my husband currently have one) by just instructing my employer to do it for me? There are no warnings on the deferral form about income limits. I had the impression DH and I had too much income to have Roths. Our AGI for 2017 was about $212,000 (married filing jointly).

I can't believe all these years I thought I had a "regular" 401K plan and now I find it's a hybrid 401K plus profit sharing. I've been hunting around on the Fidelity website to see what amount of employer matching I've been getting and what amount is profit sharing. For 2017 I contributed almost $18,000. Employer match was $5856 and profit sharing contribution was $8782, so total employer contribution was $14,638. When I look at the total contributions since inception my employer has contributed 82% of what I have contributed. This seems like a great plan, but am I missing something?

If it is a better than average plan, I'm grateful, and lucky that paying no attention to the details has (apparently) not harmed me financially! This post is a bit of a ramble, so I bolded my two actual questions. Thanks in advance for any comments. I am working on a detailed post containing all our retirement accounts so I can get some investment advice from all of you.

Braje
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Joined: Wed Jun 03, 2015 10:06 pm

Re: Trying to understand my 401K

Post by Braje » Sat Apr 14, 2018 2:04 am

It is a Roth 401k. The IRA income limits don't apply.

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brother7
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Re: Trying to understand my 401K

Post by brother7 » Sat Apr 14, 2018 5:02 am

As an employee, you can contribute to the following:
  • Pre-tax 401(k)
  • Roth 401(k)
Your employer can contribute to the following:
  • Pre-tax 401(k) match
  • Profit-sharing
No matter which you contribute to, Pre-tax or Roth, your employer match is always Pre-tax. I tried to make that clear by calling it "Pre-tax 401(k) match".

Profit-sharing contributions made by the employer are pre-tax and at the employer's discretion. That is, they choose how much to contribute, or can choose to not contribute at all. Also, your ownership of the profit-sharing is typically on a "vesting" schedule. For example, you may be vested 20% per year over 5 years. If you leave before 5 years, you get to keep only the % which you're vested.

How much your employer match is depends on your employer and should be spelled out in the Summary Plan Description (SPD). If it doesn't, a call to the benefits department should clarify things.

Hopefully I've done a good job of explaining the mechanics of how your 401(k) and profit-sharing works.

Aside from that, the most important determinant on how much your account will grow is the investments within the plan.

Generally, employees are allowed to select investments from a menu of options. If you have access to this menu, post the choices on here. Be sure to include symbols and expense ratios for each option. Also post what you're currently invested in, and the percentage in each. The community will chime in on possible changes.

Hope that helps.

Grt2bOutdoors
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Re: Trying to understand my 401K

Post by Grt2bOutdoors » Sat Apr 14, 2018 5:51 am

The match is above average, probably between 4-5 percent. The profit sharing amount you show is significant, especially if it meets or exceeds the amount of initial match.

It’s important to note that your total contribution to either Traditional 401k or Roth 401k can not exceed $18,500 or $18,500 + 6000 for age 50+ catch-up. Example - you are age 50, you contribute 18,500 pre-tax and instruct employer to put the extra $6k after tax contribution into the Roth 401k.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

JW-Retired
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Joined: Sun Dec 16, 2007 12:25 pm

Re: Trying to understand my 401K

Post by JW-Retired » Sat Apr 14, 2018 7:53 am

Sagefemme wrote:
Sat Apr 14, 2018 1:52 am
Does this mean I can start a Roth now (neither I nor my husband currently have one) by just instructing my employer to do it for me? There are no warnings on the deferral form about income limits. I had the impression DH and I had too much income to have Roths. Our AGI for 2017 was about $212,000 (married filing jointly).
You can do a Roth 401k. Individual traditional IRA accounts and Individual Roth account rules have nothing to do with Roth or pretax 401k accounts. Your AGI is a bit higher than phase-out limits for contributions to an individual Roth (amount you can contribute phases out between $189K to $199k MAGI), but these limits don't apply to a Roth 401k.

Also, since you said neither of you have any individual Roths, does that mean you also have no traditional IRAs? Including no SEP, SIMPLE, or rollover IRAs? If that's the case then you could also make individual Roth contributions via the "backdoor" maneuver, as this gets around the MAGI limit for contributions.
https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
But don't try it until you understand how/why it works, and how to do the IRS 8606 tax forms for it. Many folks mess it up.
JW
Retired at Last

Sagefemme
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Joined: Mon Mar 12, 2018 9:31 pm

Re: Trying to understand my 401K

Post by Sagefemme » Sat Apr 14, 2018 9:29 am

Thank you all for helpful replies. I did a bit of arithmetic and found the company match (just going by my Fidelity statements and dividing the employer match for all of 2016 and 2017 by my salary) is 6%. I'll verify that with the plan administrator.

I have been at this company (company A) twice, 1996-2003, and again starting in 2007 after a different interim employer (company B). So everything is 100% vested (the vesting gets to 100% after 6 years in service).

The fund choices I have are so-so. I'll post the symbols and ERs separately. But long story short there are only two index funds out of the 34 funds offered: Fidelity 500 Index Fund-Premium Class (FUSVX, ER 0.035%), and starting just last week they added Fidelity Small Cap Index Fund-Premium Class (FSSVX, ER 0.05%). I have had 100% of my account in FUSVX for about two years. I know that is too risky at my age (57) and I intend to change it as soon as I figure all this out!

I worked at company B from 2003 to 2007 and contributed to that company's 401K plan. When I returned to company A I rolled over the company B 401K to a rollover IRA. I'm still reading the Wiki on 401K, but it sounds this this (the rollover 401K) means I can't open a Roth IRA. Also the MAGI limit is $199,000 which we exceeded in 2017. My husband has no IRAs of any kind.

I'll keep reading the Wikis and try to understand how I should allocate my catch-up contribution of $6000 for 2018.

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Earl Lemongrab
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Re: Trying to understand my 401K

Post by Earl Lemongrab » Sun Apr 15, 2018 4:38 pm

If your MAGI is too high for Roth IRA, then even though you can contribute to Roth 401(k) you probably shouldn't. Tax deferral is likely more useful to you. What is your current state income tax, if any? Will you have pension in retirement?
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

Sagefemme
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Joined: Mon Mar 12, 2018 9:31 pm

Re: Trying to understand my 401K

Post by Sagefemme » Mon Apr 16, 2018 12:16 am

Earl--this is what I'm trying to figure out--whether I should contribute to Roth 401k. Seems like one way to end up with a Roth IRA eventually; if I understand correctly funds in Roth 401k can be converted into a Roth IRA at some point.

My state income tax is 9%. Federal 28% for 2017 which I guess is 24% in 2018. No pensions.

I thought there was some advantage to having a Roth IRA (which I would get from converting Roth 401K) in terms of no required minimum distributions, even if tax rate in retirement is less than now. Not sure. Any advice welcome. I'm still working on my big picture post with all our investing info in it for general advice.

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Earl Lemongrab
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Re: Trying to understand my 401K

Post by Earl Lemongrab » Mon Apr 16, 2018 10:09 am

Yes, Roth 401(k) can rolled into Roth IRAs. However, that's not the only way to get Roth in the future. If you'll likely have periods where your tax rate is lower, you can roll traditional 401(k) holdings or convert traditional IRAs to Roth IRA at a more favorable rate. That's why I asked about pensions.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

ThriftyPhD
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Re: Trying to understand my 401K

Post by ThriftyPhD » Mon Apr 16, 2018 10:54 am

Sagefemme wrote:
Sat Apr 14, 2018 9:29 am
I worked at company B from 2003 to 2007 and contributed to that company's 401K plan. When I returned to company A I rolled over the company B 401K to a rollover IRA. I'm still reading the Wiki on 401K, but it sounds this this (the rollover 401K) means I can't open a Roth IRA. Also the MAGI limit is $199,000 which we exceeded in 2017. My husband has no IRAs of any kind.
Your husband can do a Backdoor IRA, since he does not have a traditional IRA.

Can you roll your rollover IRA into your Company A 401k? If so, that would clear out your traditional IRA space to allow a Backdoor Roth for you too.

Does your company have an after tax (not Roth) option? If so, that could open up the Mega Backdoor Roth.

Sagefemme
Posts: 31
Joined: Mon Mar 12, 2018 9:31 pm

Re: Trying to understand my 401K

Post by Sagefemme » Mon Apr 16, 2018 9:29 pm

PhD--I can roll my rollover IRA into my company 401k. There is no after-tax option; just 401k and 401K Roth. I'm still digesting Wikis on these things. I hope sometime soon I'll understand why "401k Roth" and "after tax option" are not the same. In my current imperfect understanding the 401K Roth is the after-tax option.......

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Earl Lemongrab
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Re: Trying to understand my 401K

Post by Earl Lemongrab » Mon Apr 16, 2018 11:31 pm

Sagefemme wrote:
Mon Apr 16, 2018 9:29 pm
PhD--I can roll my rollover IRA into my company 401k. There is no after-tax option; just 401k and 401K Roth. I'm still digesting Wikis on these things. I hope sometime soon I'll understand why "401k Roth" and "after tax option" are not the same. In my current imperfect understanding the 401K Roth is the after-tax option.......
After-tax is like non-deductible IRA contributions. No tax break on the way in, but you owe ordinary income tax on any growth.

The advantage is that that they don't use up the 18.5k space that pretax and Roth contributions do. So you can make them in addition to the regular ones. And if your plan allows it, you can roll them out to a Roth IRA (with any growth).
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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