Frontloading 401k Mistake

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Mgmny
Posts: 10
Joined: Mon May 21, 2018 9:05 am

Frontloading 401k Mistake

Post by Mgmny » Mon May 21, 2018 9:12 am

Hey everyone!

I'm starting a new job the day after Memorial Day, and they will match 401k contributions at 30% of contributions made. Currently, my employer matches 0%. I front-loaded my 401k (apparently like an idiot) this year and have already contributed $14,500, meaning I will only be able to contribute another $4,000 to the max in 2018 leaving something like $5,000 of potential employer contributions on the table.

Do I have any options? Can I withdraw or recharacterize my previous 401k contributions from this year and then be able to reset my 401k contributions to $0 for 2018? I know I can take the money, but then I'd have a penalty plus taxes and I doubt that resets my contributions.

I'm thinking I categorize this initial $14,500 as "excess contributions" and make sure I hit $18,500 at my new employer by year end. Can I just take the distribution as a lump sum now, pay taxes on the full amount at the end of the year and tell my new employer I've contributed $0?

Any help or thoughts appreciated!

Account Info:
Contributions: $14,235
Current Balance $14,262.22 (all 401k is 2018 contributions)
"Processing fee" for withdrawal: $30

magicrat
Posts: 521
Joined: Sat Nov 29, 2014 7:04 pm

Re: Frontloading 401k Mistake

Post by magicrat » Mon May 21, 2018 9:24 am

Does your new plan allow after-tax contributions and, if yes, do they match on those contributions? That would be the easiest way if your plan is setup to allow.

Grt2bOutdoors
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Location: New York

Re: Frontloading 401k Mistake

Post by Grt2bOutdoors » Mon May 21, 2018 9:26 am

Does your employer offer a "true-up" at the end of year? In other words, even though you front-loaded the plan, the employer will "true-up" the match so that you are made whole at the end of the year, you won't miss out on the match. Inquire with your employer/plan administrator if they offer this in the plan. It may not turn out to be the mistake you believe it is.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Mgmny
Posts: 10
Joined: Mon May 21, 2018 9:05 am

Re: Frontloading 401k Mistake

Post by Mgmny » Mon May 21, 2018 9:38 am

magicrat wrote:
Mon May 21, 2018 9:24 am
Does your new plan allow after-tax contributions and, if yes, do they match on those contributions? That would be the easiest way if your plan is setup to allow.
I think you're suggesting paying tax on the $14,235 now, rolling it to the new 401(k) as after tax (I'm pretty sure they don't allow, but i need to get my hands on the full plan doc. Plan summary only calls out Roth and traditional), and having the new company pay the match on this? I can check if this works, but even then, are you suggesting that i contribute $18,500 to traditional 401(k) and then another $14,235 for after tax?

I don't mind pocketing the $14,235 minus income tax, and bumping my new 401k contribution up to whatever it takes to get $18,500 by year end.

Mgmny
Posts: 10
Joined: Mon May 21, 2018 9:05 am

Re: Frontloading 401k Mistake

Post by Mgmny » Mon May 21, 2018 9:42 am

Grt2bOutdoors wrote:
Mon May 21, 2018 9:26 am
Does your employer offer a "true-up" at the end of year? In other words, even though you front-loaded the plan, the employer will "true-up" the match so that you are made whole at the end of the year, you won't miss out on the match. Inquire with your employer/plan administrator if they offer this in the plan. It may not turn out to be the mistake you believe it is.
I think I might have confused you. There are 2 companies at play. My old company and my new company. Old company matches 0%, but I've contributed $14,235 to that plan. New company matches 30% of employee contributions regardless of schedule at year end. Because I contributed the $14,235 to old company, I don't think new company has any incentive to give me a 30% contribution on that match as it was made in a different plan at a different company.

wolf359
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Re: Frontloading 401k Mistake

Post by wolf359 » Mon May 21, 2018 9:51 am

This is what the IRS says about it: https://www.irs.gov/retirement-plans/co ... -401k-plan

This is my interpretation. Read it yourself to see if you agree.

If you tell the old company that you made excessive contributions (and how much), they will send you a check for that amount (called a "corrective distribution) and change your W-2 so that you end up adding that amount to your taxable wages. You can contribute to your new company plan and all is well.

If you wait until the end of the tax year, you may end up paying taxes on the excess twice.

The new and old companies have no idea what you contributed to the other plan. The IRS doesn't see the excess until you file taxes in April. Therefore, you can get the old company to issue a corrective distribution and reset it all. The order of the distributions does not seem to matter, as long as you're below the limit before the taxes are due.

When the old company sends you the check, they will probably withhold taxes. They may not know how to categorize this out-of-cycle payment, so they may do maximum withholding on it, like it is a bonus. Be ready for that. If they do so, you can get it back when you file for taxes in April.
Last edited by wolf359 on Mon May 21, 2018 9:55 am, edited 1 time in total.

magicrat
Posts: 521
Joined: Sat Nov 29, 2014 7:04 pm

Re: Frontloading 401k Mistake

Post by magicrat » Mon May 21, 2018 9:51 am

Mgmny wrote:
Mon May 21, 2018 9:38 am
magicrat wrote:
Mon May 21, 2018 9:24 am
Does your new plan allow after-tax contributions and, if yes, do they match on those contributions? That would be the easiest way if your plan is setup to allow.
I think you're suggesting paying tax on the $14,235 now, rolling it to the new 401(k) as after tax (I'm pretty sure they don't allow, but i need to get my hands on the full plan doc. Plan summary only calls out Roth and traditional), and having the new company pay the match on this? I can check if this works, but even then, are you suggesting that i contribute $18,500 to traditional 401(k) and then another $14,235 for after tax?

I don't mind pocketing the $14,235 minus income tax, and bumping my new 401k contribution up to whatever it takes to get $18,500 by year end.
That's not what I'm suggesting. I'm suggesting that once you hit the $18,500 cap, you keep making after-tax contributions to get the match (if your new plan is setup this way).

RickBoglehead
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Re: Frontloading 401k Mistake

Post by RickBoglehead » Mon May 21, 2018 9:53 am

This ^^^

wrongfunds
Posts: 1913
Joined: Tue Dec 21, 2010 3:55 pm

Re: Frontloading 401k Mistake

Post by wrongfunds » Mon May 21, 2018 10:03 am

wolf359 wrote:
Mon May 21, 2018 9:51 am
This is what the IRS says about it: https://www.irs.gov/retirement-plans/co ... -401k-plan

This is my interpretation. Read it yourself to see if you agree.

If you tell the old company that you made excessive contributions (and how much), they will send you a check for that amount (called a "corrective distribution) and change your W-2 so that you end up adding that amount to your taxable wages. You can contribute to your new company plan and all is well.

If you wait until the end of the tax year, you may end up paying taxes on the excess twice.

The new and old companies have no idea what you contributed to the other plan. The IRS doesn't see the excess until you file taxes in April. Therefore, you can get the old company to issue a corrective distribution and reset it all. The order of the distributions does not seem to matter, as long as you're below the limit before the taxes are due.

When the old company sends you the check, they will probably withhold taxes. They may not know how to categorize this out-of-cycle payment, so they may do maximum withholding on it, like it is a bonus. Be ready for that. If they do so, you can get it back when you file for taxes in April.
Let us assume that I had front loaded $18.5K it all in January. In September market crashes. Can I now take out my previously contributed dollars ($18.5K) and then put those dollars ($18.5K) back in at the current low market price? I don't see how that would be allowed at all.

If it is allowed, just PM me and don't tell anybody else please :-)

Mgmny
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Joined: Mon May 21, 2018 9:05 am

Re: Frontloading 401k Mistake

Post by Mgmny » Mon May 21, 2018 10:11 am

magicrat wrote:
Mon May 21, 2018 9:51 am
Mgmny wrote:
Mon May 21, 2018 9:38 am
magicrat wrote:
Mon May 21, 2018 9:24 am
Does your new plan allow after-tax contributions and, if yes, do they match on those contributions? That would be the easiest way if your plan is setup to allow.
I think you're suggesting paying tax on the $14,235 now, rolling it to the new 401(k) as after tax (I'm pretty sure they don't allow, but i need to get my hands on the full plan doc. Plan summary only calls out Roth and traditional), and having the new company pay the match on this? I can check if this works, but even then, are you suggesting that i contribute $18,500 to traditional 401(k) and then another $14,235 for after tax?

I don't mind pocketing the $14,235 minus income tax, and bumping my new 401k contribution up to whatever it takes to get $18,500 by year end.
That's not what I'm suggesting. I'm suggesting that once you hit the $18,500 cap, you keep making after-tax contributions to get the match (if your new plan is setup this way).
Ah! OK. That makes sense. If I could do this and they match it at 30% you can bet I'll be loading that account up. That would be huge! I'll do some digging.

JW-Retired
Posts: 6999
Joined: Sun Dec 16, 2007 12:25 pm

Re: Frontloading 401k Mistake

Post by JW-Retired » Mon May 21, 2018 10:16 am

magicrat wrote:
Mon May 21, 2018 9:51 am
That's not what I'm suggesting. I'm suggesting that once you hit the $18,500 cap, you keep making after-tax contributions to get the match (if your new plan is setup this way).
Yes! I did exactly this one year when I had boosted up my contributions to hit the max in April and then retire, but changed my mind and worked another couple of years.
JW
Retired at Last

Spirit Rider
Posts: 9173
Joined: Fri Mar 02, 2007 2:39 pm

Re: Frontloading 401k Mistake

Post by Spirit Rider » Mon May 21, 2018 10:22 am

The $18,500 is an employee elective contribution limit. Simply wiithdrawing the $14,500 contributions and earnings from the first employer after separation will achieve nothing.

You must remove them as excess contributions. The problem is that they are not excess contributions until after the end of the year and you have made the $18,500 in contributions to the second employer.

IRS regulations, allow, but do not require an employer to remove excess contributions and earnings. After the end of the year and you have made $18,500 in contributions to the second employer.

You could request the first employer to remove the excess contributions. However, many employers will only remove excess contributions if you are still working for them.

This very well could mean that the first employer will refuse to remove the excess contributions, but the second employer will. However, IRS regulations also require that employer matches of removed excess contributions must be forfeited.

Both employers could refuse to return the excess contributions. You would not be able to deduct them, have no way to establish basis and they would be taxable on withdrawal.

After-tax contributions have none of these problems. So hopefully, your employer allows these and matches them.

Mgmny
Posts: 10
Joined: Mon May 21, 2018 9:05 am

Re: Frontloading 401k Mistake

Post by Mgmny » Mon May 21, 2018 10:49 am

Spirit Rider wrote:
Mon May 21, 2018 10:22 am
The $18,500 is an employee elective contribution limit. Simply wiithdrawing the $14,500 contributions and earnings from the first employer after separation will achieve nothing.

You must remove them as excess contributions. The problem is that they are not excess contributions until after the end of the year and you have made the $18,500 in contributions to the second employer.

IRS regulations, allow, but do not require an employer to remove excess contributions and earnings. After the end of the year and you have made $18,500 in contributions to the second employer.

You could request the first employer to remove the excess contributions. However, many employers will only remove excess contributions if you are still working for them.

This very well could mean that the first employer will refuse to remove the excess contributions, but the second employer will. However, IRS regulations also require that employer matches of removed excess contributions must be forfeited.

Both employers could refuse to return the excess contributions. You would not be able to deduct them, have no way to establish basis and they would be taxable on withdrawal.

After-tax contributions have none of these problems. So hopefully, your employer allows these and matches them.

Thanks Spirit Rider. I was referred over here by someone on the MMM forums and told me to ask for you. Thanks!

So, you're thinking: Best bet would be getting first employer to remove contributions as excess now, but that is probably not going to happen, so then it could happen at the end of the year when it actually IS an excess? That's only if they are willing to play ball?

Thanks!

Spirit Rider
Posts: 9173
Joined: Fri Mar 02, 2007 2:39 pm

Re: Frontloading 401k Mistake

Post by Spirit Rider » Mon May 21, 2018 11:16 am

Yes, if matched employee after-tax contributions are not an option. You should try to determine what your current employer plan's policy is on requests to remove excess contributions after separation of employment.

Otherwise it makes no sense to make contributions that get matched only to have the contributions and earnings returned and the matches forfeited.

terran
Posts: 811
Joined: Sat Jan 10, 2015 10:50 pm

Re: Frontloading 401k Mistake

Post by terran » Mon May 21, 2018 2:08 pm

Spirit Rider wrote:
Mon May 21, 2018 10:22 am
Both employers could refuse to return the excess contributions. You would not be able to deduct them, have no way to establish basis and they would be taxable on withdrawal.
Are you saying that the only penalty for leaving excess contributions in a tax deferred 401(k) is that you don't get the deduction (so you pay taxes on that contribution now) and you will pay taxes on withdrawal as normal?

If so, couldn't it still make sense to do this in some circumstances where the match is more than the tax? For example, since the OP gets a 30% match on all contributions, a current marginal tax bracket (including state taxes) of anything under 30% should still make contributing the best option. Essentially the employer is paying the tax on the excess contributions now and any difference between the 30% match and the marginal tax bracket is extra money the OP wouldn't have otherwise gotten.

Mgmny
Posts: 10
Joined: Mon May 21, 2018 9:05 am

Re: Frontloading 401k Mistake

Post by Mgmny » Mon May 21, 2018 2:29 pm

Here is what my TPA came back with:

“I verified with our compliance department that there is no ability to shift deferrals between plans or to call the contributions to [First company]’s 401(k) plan an excess contribution. This participant made an affirmative election to contribution and it cannot be reversed. The only loop hole is that he could defer the max into his new plan which will result in a 402(g) failure and he can choose which plan he would like the overage contributions and earnings removed from. He would then claim the overage as income for the year and pay the applicable taxes. It would be his responsibility to notify the applicable parties and provide documentation for the excess calculation to be withdrawn early next year.”

Based on this and what wolf said, do I need to pay taxes on this twice for some reason?

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Frontloading 401k Mistake

Post by Spirit Rider » Mon May 21, 2018 5:58 pm

terran wrote:
Mon May 21, 2018 2:08 pm
Spirit Rider wrote:
Mon May 21, 2018 10:22 am
Both employers could refuse to return the excess contributions. You would not be able to deduct them, have no way to establish basis and they would be taxable on withdrawal.
Are you saying that the only penalty for leaving excess contributions in a tax deferred 401(k) is that you don't get the deduction (so you pay taxes on that contribution now) and you will pay taxes on withdrawal as normal?

If so, couldn't it still make sense to do this in some circumstances where the match is more than the tax? For example, since the OP gets a 30% match on all contributions, a current marginal tax bracket (including state taxes) of anything under 30% should still make contributing the best option. Essentially the employer is paying the tax on the excess contributions now and any difference between the 30% match and the marginal tax bracket is extra money the OP wouldn't have otherwise gotten.
I would like Alan S. to weigh in on this. It would appear at first glance that you are correct.

Consequences to a Participant Who Makes Excess Deferrals to a 401(k) Plan

Spirit Rider
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Re: Frontloading 401k Mistake

Post by Spirit Rider » Mon May 21, 2018 6:13 pm

Mgmny wrote:
Mon May 21, 2018 2:29 pm
Here is what my TPA came back with:

“I verified with our compliance department that there is no ability to shift deferrals between plans or to call the contributions to [First company]’s 401(k) plan an excess contribution. This participant made an affirmative election to contribution and it cannot be reversed. The only loop hole is that he could defer the max into his new plan which will result in a 402(g) failure and he can choose which plan he would like the overage contributions and earnings removed from. He would then claim the overage as income for the year and pay the applicable taxes. It would be his responsibility to notify the applicable parties and provide documentation for the excess calculation to be withdrawn early next year.”

Based on this and what wolf said, do I need to pay taxes on this twice for some reason?
The bolded section would seem to imply that your current employer's plan would agree to return any excess contributions and earnings from their plan.

wolf359
Posts: 1460
Joined: Sun Mar 15, 2015 8:47 am

Re: Frontloading 401k Mistake

Post by wolf359 » Mon May 21, 2018 6:42 pm

Mgmny wrote:
Mon May 21, 2018 2:29 pm
Here is what my TPA came back with:

“I verified with our compliance department that there is no ability to shift deferrals between plans or to call the contributions to [First company]’s 401(k) plan an excess contribution. This participant made an affirmative election to contribution and it cannot be reversed. The only loop hole is that he could defer the max into his new plan which will result in a 402(g) failure and he can choose which plan he would like the overage contributions and earnings removed from. He would then claim the overage as income for the year and pay the applicable taxes. It would be his responsibility to notify the applicable parties and provide documentation for the excess calculation to be withdrawn early next year.”

Based on this and what wolf said, do I need to pay taxes on this twice for some reason?
So, they're saying that they won't let you reverse the contributions now because the contributions are not excess (yet). But if you go ahead and max out contributions to the second employer, then they WILL be excess, and you can then reverse one of them.

The relevant IRS paragraph is quoted below. I believe it is saying that the window for getting the corrective distribution so you are not being taxed twice is prior to April 15.

Again, I'm not a tax expert or anything, so you may want to verify with a professional.
Treatment of excess deferrals

Unless timely distributed, excess deferrals are (1) included in a participant’s taxable income for the year contributed, and (2) taxed a second time when the deferrals are ultimately distributed from the plan. See IRC Sections 402(g)(1) and 402(g)(2) and Reg. Section 1.402(g)-1(e)(2). A participant who fails to receive a distribution of the excess deferrals does not receive basis in his pre-tax deferral account equal to the amount of excess deferrals. See IRC Section 402(g)(6).

The amount of the excess deferral will not be taxed twice if a corrective distribution is made. See IRC Section 402(g)(2). The corrective distribution must include the amount of the excess deferrals, along with amounts earned on the excess deferrals during the calendar year during which the deferrals are made without regard to income earned during the “gap period” between the close of calendar year in which the excess contribution was made and the time of actual corrective distribution. See IRC Section 402(g)(2)(A)(ii). Additionally, the corrective distribution must be made be made no later than April 15th following the close of the calendar year during which the excess deferral was made. See IRC Section 402(g)(2)(A)(ii). For example, excess deferrals made during 2016 must be distributed by April 15, 2017. This April 15th deadline is not postponed by extending the filing of the employee's federal income tax return.

To the extent that a corrective distribution is not made within the correction period, the excess deferrals may not be distributed until a distribution is otherwise permissible under the terms of the plan, or the distribution is necessary to avoid plan disqualification under IRC Section 401(a)(30). Reg. Section 1.402(g)-1(e)(8)(iii) provides that distributions of excess deferrals after the correction period may be distributed from a 401(k) plan only when permitted under IRC Section 401(k)(2)(B).

Mgmny
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Re: Frontloading 401k Mistake

Post by Mgmny » Tue May 22, 2018 7:36 am

Perfect! Thanks everyone!


Not to make this any more complicated, but can I /what if I roll this over to an IRA now? Would I be able to remove the excess contribution myself at year end? Or is that just making the mess stickier??

wrongfunds
Posts: 1913
Joined: Tue Dec 21, 2010 3:55 pm

Re: Frontloading 401k Mistake

Post by wrongfunds » Tue May 22, 2018 7:39 am

Guys, just think it over will you?

If one could reverse 401K contributions, wouldn't everybody do that when the market drops later in the year? You ask your company to give back all of your contribution IN DOLLARS contributed and then put it back again next day?

Does legitimate excess contribution gets returned back to you with losses or gains? Does not it comes back to you as actual excess contribution dollars instead as the value of the account?

You really think IRS would be dumb enough to let you take out your 401K contribution because you feel like it?

You don't need a $500/hr tax professional to see why this is not possible.

Mgmny
Posts: 10
Joined: Mon May 21, 2018 9:05 am

Re: Frontloading 401k Mistake

Post by Mgmny » Tue May 22, 2018 8:04 am

wrongfunds wrote:
Tue May 22, 2018 7:39 am
Guys, just think it over will you?

If one could reverse 401K contributions, wouldn't everybody do that when the market drops later in the year? You ask your company to give back all of your contribution IN DOLLARS contributed and then put it back again next day?

Does legitimate excess contribution gets returned back to you with losses or gains? Does not it comes back to you as actual excess contribution dollars instead as the value of the account?

You really think IRS would be dumb enough to let you take out your 401K contribution because you feel like it?

You don't need a $500/hr tax professional to see why this is not possible.
I wouldn't and don't expect to get my contributions back, but rather the account balance. Right now I have gains of only $37 for the year, so it really isn't a big deal. But if I were down $1,000 I wouldn't expect my company to give me back the total contributions, but rather the account balance.

ryman554
Posts: 1116
Joined: Sun Jan 12, 2014 9:44 pm

Re: Frontloading 401k Mistake

Post by ryman554 » Tue May 22, 2018 8:14 am

wrongfunds wrote:
Tue May 22, 2018 7:39 am
Guys, just think it over will you?

If one could reverse 401K contributions, wouldn't everybody do that when the market drops later in the year? You ask your company to give back all of your contribution IN DOLLARS contributed and then put it back again next day?

Does legitimate excess contribution gets returned back to you with losses or gains? Does not it comes back to you as actual excess contribution dollars instead as the value of the account?

You really think IRS would be dumb enough to let you take out your 401K contribution because you feel like it?

You don't need a $500/hr tax professional to see why this is not possible.
All I can say is that you should read the tax law.

Individual 401(k) plans will not allow you to over-contribute. It's only the case where you have multiple (possibly concurrent!) plans that this occurs. Remember, you can't take out excess contributions unless your contributions are really in excess.

I would have thought myself that there was a timing rule in the tax law, but go read it for yourself. It appears not.

Ask yourself your scenarios works for excess contributions to an IRA or HSA... Say you open up a second IRA later in the year and contribute 2x the yearly maximum, and then get your excess contributions back. Can you get it from the first IRA? What does the tax law say about that?

ryman554
Posts: 1116
Joined: Sun Jan 12, 2014 9:44 pm

Re: Frontloading 401k Mistake

Post by ryman554 » Tue May 22, 2018 8:16 am

Mgmny wrote:
Tue May 22, 2018 7:36 am
Perfect! Thanks everyone!


Not to make this any more complicated, but can I /what if I roll this over to an IRA now? Would I be able to remove the excess contribution myself at year end? Or is that just making the mess stickier??
For the love of all that is good, please don't do this.

You have to get the $$ out of the 401(k) with the right distribution code on your 1099 (and updated associated W2 since you will have more income) to fix your problem. Once you roll it over (it will have the wrong distribution code), you've got to get it *back* into the 401(k) and then out of the 401(k) in the right way. It's an absolute mess.

Mgmny
Posts: 10
Joined: Mon May 21, 2018 9:05 am

Re: Frontloading 401k Mistake

Post by Mgmny » Tue May 22, 2018 8:41 am

ryman554 wrote:
Tue May 22, 2018 8:16 am
Mgmny wrote:
Tue May 22, 2018 7:36 am
Perfect! Thanks everyone!


Not to make this any more complicated, but can I /what if I roll this over to an IRA now? Would I be able to remove the excess contribution myself at year end? Or is that just making the mess stickier??
For the love of all that is good, please don't do this.

You have to get the $$ out of the 401(k) with the right distribution code on your 1099 (and updated associated W2 since you will have more income) to fix your problem. Once you roll it over (it will have the wrong distribution code), you've got to get it *back* into the 401(k) and then out of the 401(k) in the right way. It's an absolute mess.
Duly noted. I will not roll it over!

Flyer24
Posts: 460
Joined: Sun Apr 08, 2018 4:21 pm

Re: Frontloading 401k Mistake

Post by Flyer24 » Tue May 22, 2018 8:56 am

magicrat wrote:
Mon May 21, 2018 9:51 am
Mgmny wrote:
Mon May 21, 2018 9:38 am
magicrat wrote:
Mon May 21, 2018 9:24 am
Does your new plan allow after-tax contributions and, if yes, do they match on those contributions? That would be the easiest way if your plan is setup to allow.
I think you're suggesting paying tax on the $14,235 now, rolling it to the new 401(k) as after tax (I'm pretty sure they don't allow, but i need to get my hands on the full plan doc. Plan summary only calls out Roth and traditional), and having the new company pay the match on this? I can check if this works, but even then, are you suggesting that i contribute $18,500 to traditional 401(k) and then another $14,235 for after tax?

I don't mind pocketing the $14,235 minus income tax, and bumping my new 401k contribution up to whatever it takes to get $18,500 by year end.
That's not what I'm suggesting. I'm suggesting that once you hit the $18,500 cap, you keep making after-tax contributions to get the match (if your new plan is setup this way).
It is a combined limit. You can’t continue to contribute to an after-tax if your combined accounts already hit $18,500.

magicrat
Posts: 521
Joined: Sat Nov 29, 2014 7:04 pm

Re: Frontloading 401k Mistake

Post by magicrat » Tue May 22, 2018 9:08 am

Flyer24 wrote:
Tue May 22, 2018 8:56 am
magicrat wrote:
Mon May 21, 2018 9:51 am
Mgmny wrote:
Mon May 21, 2018 9:38 am
magicrat wrote:
Mon May 21, 2018 9:24 am
Does your new plan allow after-tax contributions and, if yes, do they match on those contributions? That would be the easiest way if your plan is setup to allow.
I think you're suggesting paying tax on the $14,235 now, rolling it to the new 401(k) as after tax (I'm pretty sure they don't allow, but i need to get my hands on the full plan doc. Plan summary only calls out Roth and traditional), and having the new company pay the match on this? I can check if this works, but even then, are you suggesting that i contribute $18,500 to traditional 401(k) and then another $14,235 for after tax?

I don't mind pocketing the $14,235 minus income tax, and bumping my new 401k contribution up to whatever it takes to get $18,500 by year end.
That's not what I'm suggesting. I'm suggesting that once you hit the $18,500 cap, you keep making after-tax contributions to get the match (if your new plan is setup this way).
It is a combined limit. You can’t continue to contribute to an after-tax if your combined accounts already hit $18,500.
You're mistaken. The limit for annual contributions to a 401k plan is $55k. This is comprised of:

1. $18.5k contributions to pre-tax and/or Roth (combined limit)
2. Employer contributions
3. After-tax (not Roth) contributions

Note that not all plans allow for #2 and #3

wolf359
Posts: 1460
Joined: Sun Mar 15, 2015 8:47 am

Re: Frontloading 401k Mistake

Post by wolf359 » Tue May 22, 2018 9:32 am

wrongfunds wrote:
Tue May 22, 2018 7:39 am
Guys, just think it over will you?

If one could reverse 401K contributions, wouldn't everybody do that when the market drops later in the year? You ask your company to give back all of your contribution IN DOLLARS contributed and then put it back again next day?

Does legitimate excess contribution gets returned back to you with losses or gains? Does not it comes back to you as actual excess contribution dollars instead as the value of the account?

You really think IRS would be dumb enough to let you take out your 401K contribution because you feel like it?

You don't need a $500/hr tax professional to see why this is not possible.
I suggest you read the link from the IRS that was provided. This is a situation in which the OP has changed jobs, such that there is a situation in which excess contributions can occur. If you stay with the same employer, that employer will not allow you to over-contribute to the 401k plan. The situation you describe is a strawman that cannot occur. You must first show that you are in violation of IRC Section 401(g) so that you can get a corrective distribution.

In addition, nothing in the code or my previous statements say that the employer has to guarantee your returns. According to the IRS code (which I cited), that corrective distribution is required to include the excess deferrals as well as any earnings on those excess deferrals. If a major crash occurs, you may well be in a situation in which have to pay taxes on your excess deferrals, but only get your remaining balance back. The design of a 401-k is that the individual is taking all the investment risk.

Mgmny
Posts: 10
Joined: Mon May 21, 2018 9:05 am

Re: Frontloading 401k Mistake

Post by Mgmny » Thu Dec 06, 2018 8:35 am

Sorry to bump this old thread, but I have a year-end update.


I maxed my new 401k, and the old one agreed to the excessive-contribution distribution yesterday. HOWEVER, the distribution is coming from the TPA - not my former employer, so no income taxes will be withheld and my W-2 will not be updated with my new taxable income and 401k deferments.

This seems like bad news if I get audited? What do people think? Obviously I'll do my own math and add the 401k contribution to my taxable income when I file for 2018, but my W2s won't match if I get audited...


Thoughts?

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