Overall defined contribution plan limit 2020 - confusion

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Topic Author
ao1philly
Posts: 4
Joined: Mon Mar 04, 2019 8:40 pm

Overall defined contribution plan limit 2020 - confusion

Post by ao1philly » Thu Feb 06, 2020 4:19 pm

I am 54 and understand that my overall defined contribution plan limit for 2020 is $63,500 including catch up contributions.

I am planning on fully funding this amount thru my employer 401K plan with both pre and post tax contributions and then converting the post tax amount to a brokerage Roth IRA through the backdoor method.

My question / confusion which I cannot find a solid answer - can I separately contribute an additional $7000 to my brokerage Roth IRA or does the $63.500 limit include both brokerage account Roth IRA contributions and employer 401K plans?

Thanks.

lakpr
Posts: 4464
Joined: Fri Mar 18, 2011 9:59 am

Re: Overall defined contribution plan limit 2020 - confusion

Post by lakpr » Thu Feb 06, 2020 5:32 pm

ao1philly wrote:
Thu Feb 06, 2020 4:19 pm
I am 54 and understand that my overall defined contribution plan limit for 2020 is $63,500 including catch up contributions.

I am planning on fully funding this amount thru my employer 401K plan with both pre and post tax contributions and then converting the post tax amount to a brokerage Roth IRA through the backdoor method.

My question / confusion which I cannot find a solid answer - can I separately contribute an additional $7000 to my brokerage Roth IRA or does the $63.500 limit include both brokerage account Roth IRA contributions and employer 401K plans?

Thanks.
Easy question first: Your backdoor Roth IRA contribution has nothing to do with what you will be contributing to the Mega backdoor Roth at your employer. Contribute away ... as long as you do not have any Traditional IRAs in the mix, at any custodian, you are good.

The slightly-harder question: the limit is not $63,500. It is only $57,000 for 2020.
What you might be thinking of, is the CATCH UP contributions.
The catch-up contributions, limit $6500 for 2020, can only be Traditional 401k or Roth 401k.

Catch-up contributions are NOT eligible for after-tax 401k contributions that can be rolled over to the Roth 401k/Roth IRA. They also do not count towards the $57k limit.

You also forgot the employer match in the mix -- not sure if that's because your employer does not offer any match.
If your employer matches, then the max you can contribute to after-tax is reduced to: ($57k limit - employer match - $19,500 assuming you max that portion out)

Hope that helps ...

ExitStageLeft
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Joined: Sat Jan 20, 2018 4:02 pm

Re: Overall defined contribution plan limit 2020 - confusion

Post by ExitStageLeft » Thu Feb 06, 2020 6:44 pm

ao1philly wrote:
Thu Feb 06, 2020 4:19 pm
...
My question / confusion which I cannot find a solid answer - can I separately contribute an additional $7000 to my brokerage Roth IRA or does the $63.500 limit include both brokerage account Roth IRA contributions and employer 401K plans?

Thanks.
Well technically, you're making a non-deductible contribution to a traditional IRA. You can always do that, even if you have maxed out your retirement plan contributions. With catch-up that is indeed $7k for 2020.

The follow-on Roth conversion can happen this year or next. As lakpr noted, your tax-deferred IRA balance should be $0.

Edit to add: I assume your income is too high to allow a direct Roth IRA contribution. That may be a bad assumption. Will your reported income be more than $124k?

https://www.irs.gov/retirement-plans/pl ... e-for-2020

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ThePrune
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Location: Midland, MI

Re: Overall defined contribution plan limit 2020 - confusion

Post by ThePrune » Thu Feb 06, 2020 8:30 pm

ao1philly,

lakpr gave you an excellent and reliable answer. I only felt the need to state this because sometimes you’ll see responses on this Forum that aren’t entirely correct (to put it politely).
Investment skill is often just luck in sheep's clothing.

TropikThunder
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Joined: Sun Apr 03, 2016 5:41 pm

Re: Overall defined contribution plan limit 2020 - confusion

Post by TropikThunder » Thu Feb 06, 2020 8:43 pm

ExitStageLeft wrote:
Thu Feb 06, 2020 6:44 pm
ao1philly wrote:
Thu Feb 06, 2020 4:19 pm
...
My question / confusion which I cannot find a solid answer - can I separately contribute an additional $7000 to my brokerage Roth IRA or does the $63.500 limit include both brokerage account Roth IRA contributions and employer 401K plans?

Thanks.
Well technically, you're making a non-deductible contribution to a traditional IRA. You can always do that, even if you have maxed out your retirement plan contributions. With catch-up that is indeed $7k for 2020.

The follow-on Roth conversion can happen this year or next. As lakpr noted, your tax-deferred IRA balance should be $0.

Edit to add: I assume your income is too high to allow a direct Roth IRA contribution. That may be a bad assumption. Will your reported income be more than $124k?

https://www.irs.gov/retirement-plans/pl ... e-for-2020
You're describing the process for what starts as a non-deductible IRA contribution. OP is talking about what starts as a non-deductible 401k contribution - two totally different things.
ao1philly wrote:
Thu Feb 06, 2020 4:19 pm
...
My question / confusion which I cannot find a solid answer - can I separately contribute an additional $7000 to my brokerage Roth IRA or does the $63.500 limit include both brokerage account Roth IRA contributions and employer 401K plans?

Thanks.
Mega-backdoor Roth conversions (non-deductible 401k contributions rolled over into Roth IRA) do not count as IRA contributions, since they aren't made directly to an IRA (i.e., the $63,500 limit does not include direct IRA contributions). Note, you may or may not be eligible to make a direct Roth IRA contribution based on your AGI, but that's a separate question.

Boatguy
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Re: Overall defined contribution plan limit 2020 - confusion

Post by Boatguy » Thu Feb 06, 2020 9:04 pm

@lakpr
Sorry, I found your $63500 vs $57000 response confusing. I thought the OP was going to put his first $26k ($19.5k + $6.5k catch-up) into pretax and then the balance into the spillover up to the $63500 (less employer match) maximum. So, under that scenario, the max contribution is indeed $63500 (including employer match), no?

TropikThunder
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Joined: Sun Apr 03, 2016 5:41 pm

Re: Overall defined contribution plan limit 2020 - confusion

Post by TropikThunder » Thu Feb 06, 2020 9:13 pm

Boatguy wrote:
Thu Feb 06, 2020 9:04 pm
@lakpr
Sorry, I found your $63500 vs $57000 response confusing. I thought the OP was going to put his first $26k ($19.5k + $6.5k catch-up) into pretax and then the balance into the spillover up to the $63500 (less employer match) maximum. So, under that scenario, the max contribution is indeed $63500 (including employer match), no?
I think it's just a semantics difference but I didn't feel like OP was confused. Yes, the grand total is $63,500 counting all sources (employee elective, employee catch-up elective, employer, and employee post-tax).

lakpr
Posts: 4464
Joined: Fri Mar 18, 2011 9:59 am

Re: Overall defined contribution plan limit 2020 - confusion

Post by lakpr » Fri Feb 07, 2020 6:09 am

@Boatguy,

Yes, under the scenario you did describe, the total contributions would add up to $63,500. I am just making the IRS rules more explicit, catchup contributions are not eligible to be included for after tax. Simply saying $63,500 is the limit for folks who are or will be older than 50 this year, MAY lead to confusion. One cannot defer, say $12k to pretax or Roth 401k, employer match for example $5k; the max after tax contributions is just $40k. Not $51.5k.

Even if he contributed $19.5k, plus employer match $5k (assume that is the max employer would kick in), his after tax contributions are limited to $57k - $19.5k - $5k = $32.5k.

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

Re: Overall defined contribution plan limit 2020 - confusion

Post by Spirit Rider » Fri Feb 07, 2020 10:01 am

Sometimes semantics matter. To put it another way there is no $63.5K limit. There is only a possible $63.5K total.

There are two separate limits. An annual addition limit (2020 = $57K) and a catch-up contribution limit (2020 = $6.5K). The catch-up contribution limit only applies when the employee deferral limit (2020 = $19.5K) is reached.

Catch-up contribution can only be pre-tax traditional employee contributions or post-tax designated Roth contributions. Catch-up contributions can never be employee after-tax contributions or pre-tax employer contributions.

It is imprecise and misleading to refer to a $63.5K limit.

Topic Author
ao1philly
Posts: 4
Joined: Mon Mar 04, 2019 8:40 pm

Re: Overall defined contribution plan limit 2020 - confusion

Post by ao1philly » Fri Feb 07, 2020 4:54 pm

Thanks everyone - I gained more knowledge reading your responses vs 2 days trying to google a correct answer!

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