reverse/rollback contributions to 401K possible?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
redheadinvestor
Posts: 10
Joined: Sun Jan 03, 2016 2:30 am

reverse/rollback contributions to 401K possible?

Post by redheadinvestor » Sun Aug 11, 2019 9:45 pm

Up until recently I am employed full time and my wife is stay at home mom. I participate in my employer 401K plan, contribute maximum allowed. In addition we have traditional IRA on my wife's name with Vanguard. I am contributing maximum allowed to traditional IRA for last 10 years or so. So far we have contributed $4000 to her traditional IRA account for this year(2019).

However beginning this year my wife started as contractor in a low pay job, switched to full time since last month. As part of benefits enrollment we declined all the coverage for this year. As far as I remember there is no mention of 401K in it. She got her first pay check last week and we noticed that they automatically contribute 3% of salary into her 401K account(managed by Schwab).

Now we ended up in a situation where we contributed to traditional IRA but we are not eligible for it. What are my options?
- Can we ask wif'e's employer to reverse current 401K contribution and stop all future contributions for reminder of the year? Does it make us eligible for traditional IRA contributions? Even if make 50% of future contribution to 401K for remaining year we are not going to hit our current IRA contribution limit of 6K.
- We may make us eligible for partial contribution to Roth IRA, can we ask Vanguard to switch our current contributions to Roth IRA? I am hesitant to contribute to Roth IRA as I am likely to be in lower tax bracket in retirement than now.
- What other options do we have?

I believe worst case scenario we can ask Vanguard to reverse this year's contributions to IRA. Apparently this is possible but with some complications at tax return. But more importantly we will end up paying more in taxes for this year.

Spirit Rider
Posts: 10991
Joined: Fri Mar 02, 2007 2:39 pm

Re: reverse/rollback contributions to 401K possible?

Post by Spirit Rider » Sun Aug 11, 2019 9:59 pm

redheadinvestor wrote:
Sun Aug 11, 2019 9:45 pm
- Can we ask wif'e's employer to reverse current 401K contribution and stop all future contributions for reminder of the year? Does it make us eligible for traditional IRA contributions? Even if make 50% of future contribution to 401K for remaining year we are not going to hit our current IRA contribution limit of 6K.
No, this is an employer non-elective contribution. Section 401(k) and IRS regulations implementing that law require the employer to make the same percentage contributions to all employees. You have no ability to decline.
- We may make us eligible for partial contribution to Roth IRA, can we ask Vanguard to switch our current contributions to Roth IRA? I am hesitant to contribute to Roth IRA as I am likely to be in lower tax bracket in retirement than now.
Yes, you can recharacterize the traditional IRA contribution to a Roth IRA. That is assuming your Roth MAGI allows you to make direct Roth contributions.
- What other options do we have?
Backdoor Roth if your Roth MAGI is too high, if you can both rollover your respective traditional IRA pre-tax balances to your respective 401k plans.
I believe worst case scenario we can ask Vanguard to reverse this year's contributions to IRA. Apparently this is possible but with some complications at tax return. But more importantly we will end up paying more in taxes for this year.
Yes, you can withdraw excess contributions.

If you have contributed the maximum to your 401k and traditional IRA, are you sure you were below the traditional IRA deduction income limit?

Topic Author
redheadinvestor
Posts: 10
Joined: Sun Jan 03, 2016 2:30 am

Re: reverse/rollback contributions to 401K possible?

Post by redheadinvestor » Sun Aug 11, 2019 10:28 pm

Spirit Rider wrote:
Sun Aug 11, 2019 9:59 pm
redheadinvestor wrote:
Sun Aug 11, 2019 9:45 pm
- Can we ask wif'e's employer to reverse current 401K contribution and stop all future contributions for reminder of the year? Does it make us eligible for traditional IRA contributions? Even if make 50% of future contribution to 401K for remaining year we are not going to hit our current IRA contribution limit of 6K.
No, this is an employer non-elective contribution. Section 401(k) and IRS regulations implementing that law require the employer to make the same percentage contributions to all employees. You have no ability to decline.
- We may make us eligible for partial contribution to Roth IRA, can we ask Vanguard to switch our current contributions to Roth IRA? I am hesitant to contribute to Roth IRA as I am likely to be in lower tax bracket in retirement than now.
Yes, you can recharacterize the traditional IRA contribution to a Roth IRA. That is assuming your Roth MAGI allows you to make direct Roth contributions.
- What other options do we have?
Backdoor Roth if your Roth MAGI is too high, if you can both rollover your respective traditional IRA pre-tax balances to your respective 401k plans.
I believe worst case scenario we can ask Vanguard to reverse this year's contributions to IRA. Apparently this is possible but with some complications at tax return. But more importantly we will end up paying more in taxes for this year.
Yes, you can withdraw excess contributions.

If you have contributed the maximum to your 401k and traditional IRA, are you sure you were below the traditional IRA deduction income limit?
Not sure if I understand the question -> IRA is on my wife's name. My income last year was ~200K, contribution were 18.5K to my 401K and 5.5K to my wife's traditional IRA. I was planning to do the same until now for this year.

Thanks for your quick response.

HomeStretch
Posts: 1144
Joined: Thu Dec 27, 2018 3:06 pm

Re: reverse/rollback contributions to 401K possible?

Post by HomeStretch » Sun Aug 11, 2019 10:55 pm

redheadinvestor wrote:
Sun Aug 11, 2019 9:45 pm
She got her first pay check last week and we noticed that they automatically contribute 3% of salary into her 401K account(managed by Schwab).
Please clarify. Are you saying that the employer is withholding 3% from your wife’s pay check as an employEE 401k contribution (perhaps under an automatic 401k enrollment feature)? Or are you saying that the employer is contributing out of the employer’s pocket 3% into your wife’s 401k account as an employER contribution?

Spirit Rider
Posts: 10991
Joined: Fri Mar 02, 2007 2:39 pm

Re: reverse/rollback contributions to 401K possible?

Post by Spirit Rider » Sun Aug 11, 2019 11:58 pm

It looks like we might have a failure to communicate. First when you said "we" contributed to a traditional IRA, I thought you meant each of you.

Second, as questioned by @HomeStretch. Did the "employer" contribute an amount = 3% of your salary or did your paycheck reflect a 3% salary deduction? If the former, it is as I replied. You can not stop this.

If it is the latter, as suggested by @HomeStretch. It can be an automatic enrollment program. In this case you can ask to disenroll and withdraw the contributions

lakpr
Posts: 2103
Joined: Fri Mar 18, 2011 9:59 am

Re: reverse/rollback contributions to 401K possible?

Post by lakpr » Mon Aug 12, 2019 12:52 am

Spirit Rider wrote:
Sun Aug 11, 2019 11:58 pm
If it is the latter, as suggested by @HomeStretch. It can be an automatic enrollment program. In this case you can ask to disenroll and withdraw the contributions
Wouldn’t it be better for the OP’s wife to actually withdraw the traditional IRA contribution and go all in into the company 401k plan, even in this case?

With a $200k salary on OP’s side, less $19k 401k contributions, they are at $181k income. They are, assuming this is an auto enrollment into 401k plan, out of the range where they can contribute to a traditional IRA (covered by a workplace plan, so can’t contribute to a traditional IRA as the income is greater than $103k). If the OP’s wife makes even $11k in the entire year, they enter the phase out limits to contribute to Roth IRA even.

Since it appears that the primary motivation of the OP is to reduce the tax burden, the better plan of action should be to undo the traditional IRA contribution, and contribute the max to wife’s 401k plan. Same end result.

Spirit Rider
Posts: 10991
Joined: Fri Mar 02, 2007 2:39 pm

Re: reverse/rollback contributions to 401K possible?

Post by Spirit Rider » Tue Aug 13, 2019 12:29 am

lakpr wrote:
Mon Aug 12, 2019 12:52 am
Spirit Rider wrote:
Sun Aug 11, 2019 11:58 pm
If it is the latter, as suggested by @HomeStretch. It can be an automatic enrollment program. In this case you can ask to disenroll and withdraw the contributions
Wouldn’t it be better for the OP’s wife to actually withdraw the traditional IRA contribution and go all in into the company 401k plan, even in this case?
Yes, if they can't rollover her pre-tax IRA assets. However, if they can rollover her pre-tax assets, a backdoor Roth would be better.
With a $200k salary on OP’s side, less $19k 401k contributions, they are at $181k income. They are, assuming this is an auto enrollment into 401k plan, out of the range where they can contribute to a traditional IRA (covered by a workplace plan, so can’t contribute to a traditional IRA as the income is greater than $103k). If the OP’s wife makes even $11k in the entire year, they enter the phase out limits to contribute to Roth IRA even.

Since it appears that the primary motivation of the OP is to reduce the tax burden, the better plan of action should be to undo the traditional IRA contribution, and contribute the max to wife’s 401k plan. Same end result
Or if they can afford to, contribute the max to the wife's 401k and do Backdoor Roth's

retiredjg
Posts: 37169
Joined: Thu Jan 10, 2008 12:56 pm

Re: reverse/rollback contributions to 401K possible?

Post by retiredjg » Tue Aug 13, 2019 7:31 am

redheadinvestor wrote:
Sun Aug 11, 2019 9:45 pm
Up until recently I am employed full time and my wife is stay at home mom. I participate in my employer 401K plan, contribute maximum allowed. In addition we have traditional IRA on my wife's name with Vanguard. I am contributing maximum allowed to traditional IRA for last 10 years or so. So far we have contributed $4000 to her traditional IRA account for this year(2019).
It is unclear whether all these 10 or so contributions to tIRA were actually deductible from your taxable income. With your high salary, they may not have been. This needs to be clarified before making further decisions.

If you don't know for sure, look at all the tax returns. An IRA deduction should show up on line 32 of the old form. I don't know where it is on the new postcard size form.


Now we ended up in a situation where we contributed to traditional IRA but we are not eligible for it.
Having a plan at work does not make her ineligible to contribute to tIRA. At your salary level, it does mean you cannot deduct that contribution to tIRA from your taxable income. If this is the first ever non-deductible contribution to Her IRA, you might not want to do it. And yes, you can have Vanguard give you back to $4k contribution as if it never happened. Call them (don't just take the money out).


- We may make us eligible for partial contribution to Roth IRA, can we ask Vanguard to switch our current contributions to Roth IRA? I am hesitant to contribute to Roth IRA as I am likely to be in lower tax bracket in retirement than now.
There is no need to be hesitant to contribute to Roth IRA. Because of your joint income, that money is going to be taxed anyway whether it goes to Roth or to a taxable account. This is not the same thing as deciding between using traditional 401k vs Roth 401k.

Post Reply