401k contribution percentages greater than take home pay for a single paycheck, how will funds be distributed?

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forouronekay
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Joined: Wed Nov 24, 2021 10:45 pm

401k contribution percentages greater than take home pay for a single paycheck, how will funds be distributed?

Post by forouronekay »

My workplace uses Fidelity as their 401k provider. Fidelity allows me to allocate up to 85% total of my gross pay towards traditional, roth, and after-tax 401k.

If I have 30% withheld (70% take home pay < 85% contributions set in Fidelity) and I have the following allocations:

40% traditional 401k
40% roth 401k
5% after-tax 401k

How will the funds be distributed? Is there an order of operations for funding 401k types?
Last edited by forouronekay on Thu Nov 25, 2021 7:12 pm, edited 1 time in total.
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markjk
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by markjk »

I've contributed to all three account types and also use Fidelity. So, I'll try to help here.

You can set up the account so that once you hit the $19,500 yearly IRS contribution limit on 401k (traditional + roth) contributions, then everything after that just goes to the after-tax 401k. So, I think the only time an order of operations might matter is that last paycheck which causes your full year contributions to hit the $19,500 limit. I don't know if at that point it would split that contribution between the traditional and roth 50/50 or if it prioritizes one over the other. A call to Fidelity is probably the best way to figure that one out.

A few limits to consider as you set this up. As I mentioned above, once you get to the $19,500 limit (this limit tends to go up each year), everything will be after-tax 401k from that point forward for the calendar year. In addition, the combined total amount contributed to all 401k sources by employer and employee cannot exceed $58,000 for 2021 (this limit also tends to go up each year). Once that overall total from all sources is hit, you can no longer contribute to your 401k for the year. You want to watch this because you must contribute something each paycheck to get your company 401k match match money (assuming you get one). If you overfund your 401k before the year is over, you will lose out on your company match for however many paychecks are left in the year after you hit that $58,000 limit. You don't want to do this.

If you won't hit the $19,500 by end of year, I don't think any of this (including the order of operations question) matters.
KlangFool
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by KlangFool »

forouronekay wrote: Wed Nov 24, 2021 10:52 pm My workplace uses Fidelity as their 401k provider. Fidelity allows me to allocate up to 85% total of my gross pay towards traditional, roth, and after-tax 401k.

If I have 30% withheld (70% take home pay < 85% contributions set in Fidelity) and I have the following allocations:

40% traditional 401k
40% roth 401k
5% after-tax 401k


How will the funds be distributed? Is there an order of operations for funding 401k types?
That is the wrong answer.

A) You should max up your Trad 401K (19.5K)

B) Then, put the tax savings into Roth IRA.

C) After that contribute to After-tax 401K.

KlangFool
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markjk
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by markjk »

KlangFool wrote: Thu Nov 25, 2021 7:17 am
forouronekay wrote: Wed Nov 24, 2021 10:52 pm My workplace uses Fidelity as their 401k provider. Fidelity allows me to allocate up to 85% total of my gross pay towards traditional, roth, and after-tax 401k.

If I have 30% withheld (70% take home pay < 85% contributions set in Fidelity) and I have the following allocations:

40% traditional 401k
40% roth 401k
5% after-tax 401k


How will the funds be distributed? Is there an order of operations for funding 401k types?
That is the wrong answer.

A) You should max up your Trad 401K (19.5K)

B) Then, put the tax savings into Roth IRA.

C) After that contribute to After-tax 401K.

KlangFool
Nah, not wrong. Maybe just a different interpretation to the question but certainly not wrong. I didn't think we were talking about allocation strategy here. Due to the fact that we are talking about a large contribution amount, my interpretation went to the limits. Regardless, good information for the OP.
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firebirdparts
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by firebirdparts »

We also use fidelity, but if I am going to do after tax at all, I need to do it all year to get what’s allowed in there. So it’s pretty hard to judge or even understand your question from afar.

I have to set things up so that I’ll max out 401k traditional and I wouldn’t be too proud to just watch what they do and then adjust it early in the year. In fact I have to.

Payroll made a mistake in fact last year at bonus time. They somehow read 10 as zero and took out zero. So even if you know the rules, sometimes they’ll run a trick play.
This time is the same
Soon2BXProgrammer
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by Soon2BXProgrammer »

firebirdparts wrote: Thu Nov 25, 2021 7:36 am Payroll made a mistake in fact last year at bonus time. They somehow read 10 as zero and took out zero. So even if you know the rules, sometimes they’ll run a trick play.
If you made a valid election, and payroll makes a mistake, there are mechanisms for them to fix it.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Lionel Hutz
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by Lionel Hutz »

forouronekay wrote: Wed Nov 24, 2021 10:52 pm How will the funds be distributed? Is there an order of operations for funding 401k types?
Can you give more context as to why you’re requesting 401k contribution percentages that are greater than your net paycheck (85% vs 70%)?
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riverant
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by riverant »

This is laid out in your summary plan document for your specific 401k plan.

In mine, also had at fidelity but noting that means nothing about your plan, I designate which %s of each I want to fill (eg 7% pretax, 13% after-tax given that my plan caps my contribution at 20%).

I’ve never seen a plan that just lets you contribute a single % amount. It would have no way of determining pretax vs Roth contributions. If Roth was not an option, I could see pretax coming first until the annual limit is met and the. All contributions moving to after-tax…but the match would be screwed up then.

In short, check your summary plan description.
sailaway
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by sailaway »

In our case, I believe it is prioritized in the order listed (trad, then Roth, then after tax). However, I have never risked it because 1) it is clear that 401k would be prioritized over HSA and ESPP. And 2) matching is per contribution, so no worries about evenly spreading contributions. We just max trad early and after tax later. No point in Roth deferrals for us at the moment.
Topic Author
forouronekay
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by forouronekay »

sailaway wrote: Thu Nov 25, 2021 7:48 am In our case, I believe it is prioritized in the order listed (trad, then Roth, then after tax). However, I have never risked it because 1) it is clear that 401k would be prioritized over HSA and ESPP. And 2) matching is per contribution, so no worries about evenly spreading contributions. We just max trad early and after tax later. No point in Roth deferrals for us at the moment.
Thanks everyone for the replies. A few clarifying points:

1) My question is not about allocation strategy, just about how Fidelity will divide my paycheck between traditional, Roth, and after-tax 401ks when the total contribution percentage is greater than my take home pay.

2) Assume I won’t hit any IRS limits.

3) As to why I would contribute more than my take home pay, I am hoping that Fidelity will prioritize pre-tax, then Roth, then after-tax, so whatever’s left over will go to after-tax and I don’t need to crunch the numbers for the exact percentage. 40/40/5 is a perhaps bad example in retrospect, let’s say 20/20/45. I basically want pretax and Roth to be funded in full, and the leftover amount to go into after-tax.

Can anyone confirm this prioritization?
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riverant
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by riverant »

forouronekay wrote: Thu Nov 25, 2021 1:07 pm
sailaway wrote: Thu Nov 25, 2021 7:48 am In our case, I believe it is prioritized in the order listed (trad, then Roth, then after tax). However, I have never risked it because 1) it is clear that 401k would be prioritized over HSA and ESPP. And 2) matching is per contribution, so no worries about evenly spreading contributions. We just max trad early and after tax later. No point in Roth deferrals for us at the moment.
Thanks everyone for the replies. A few clarifying points:

1) My question is not about allocation strategy, just about how Fidelity will divide my paycheck between traditional, Roth, and after-tax 401ks when the total contribution percentage is greater than my take home pay.

2) Assume I won’t hit any IRS limits.

3) As to why I would contribute more than my take home pay, I am hoping that Fidelity will prioritize pre-tax, then Roth, then after-tax, so whatever’s left over will go to after-tax and I don’t need to crunch the numbers for the exact percentage. 40/40/5 is a perhaps bad example in retrospect, let’s say 20/20/45. I basically want pretax and Roth to be funded in full, and the leftover amount to go into after-tax.

Can anyone confirm this prioritization?
Pretax and Roth have a combined limit. You have to specify the contribution percentages for each. The plan won’t decide. While no one here can confirm how your plan actually works, I’m fairly confident the underlying assumption in your question is not valid.
Topic Author
forouronekay
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Joined: Wed Nov 24, 2021 10:45 pm

Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by forouronekay »

TJat wrote: Thu Nov 25, 2021 1:36 pm
forouronekay wrote: Thu Nov 25, 2021 1:07 pm
sailaway wrote: Thu Nov 25, 2021 7:48 am In our case, I believe it is prioritized in the order listed (trad, then Roth, then after tax). However, I have never risked it because 1) it is clear that 401k would be prioritized over HSA and ESPP. And 2) matching is per contribution, so no worries about evenly spreading contributions. We just max trad early and after tax later. No point in Roth deferrals for us at the moment.
Thanks everyone for the replies. A few clarifying points:

1) My question is not about allocation strategy, just about how Fidelity will divide my paycheck between traditional, Roth, and after-tax 401ks when the total contribution percentage is greater than my take home pay.

2) Assume I won’t hit any IRS limits.

3) As to why I would contribute more than my take home pay, I am hoping that Fidelity will prioritize pre-tax, then Roth, then after-tax, so whatever’s left over will go to after-tax and I don’t need to crunch the numbers for the exact percentage. 40/40/5 is a perhaps bad example in retrospect, let’s say 20/20/45. I basically want pretax and Roth to be funded in full, and the leftover amount to go into after-tax.

Can anyone confirm this prioritization?
Pretax and Roth have a combined limit. You have to specify the contribution percentages for each. The plan won’t decide. While no one here can confirm how your plan actually works, I’m fairly confident the underlying assumption in your question is not valid.
I am not wondering about how the plan contributes across the 401ks when the limit is hit. Assume that the limit will not be hit with this contribution. The question is about what happens when my contribution percentages set in Fidelity (85%) *for one paycheck* is greater than my gross pay minus withholdings (such as taxes) *for that paycheck*. If my take home pay is only 70%, how will that 70% be distributed across the 401k types?
InNameOnly
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Re: 401k contribution percentages greater than take home pay for a single paycheck, how will funds be distributed?

Post by InNameOnly »

When I was in the accumulation phase, I told HR I wanted to contribute $19,500 to my 401k so they just divided that amount by 26 pay periods and took $750 per check for my 401k. They used the same method for our 125 health savings plan. I would think you could setup your preferences with your HR or Accounting Dept.
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Lionel Hutz
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by Lionel Hutz »

forouronekay wrote: Thu Nov 25, 2021 4:47 pm The question is about what happens when my contribution percentages set in Fidelity (85%) *for one paycheck* is greater than my gross pay minus withholdings (such as taxes) *for that paycheck*. If my take home pay is only 70%, how will that 70% be distributed across the 401k types?
We can’t answer that for certain, only your employer/Fidelity can.

It is probable that pretax & Roth are prioritized first over after tax (again not a certainty), and between pretax and Roth it’s anyones guess how it’s split.

For that reason, I do not recommend taking this approach. Set your percentages to amounts you know for certain will be deducted without any issue. Then make adjustments as needed later on.
ReadyOrNot
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Re: 401k contribution percentages greater than take home pay for a single paycheck, how will funds be distributed?

Post by ReadyOrNot »

Are you sure that Fidelity determines that? At my Megacorp employer, it was actually payroll that directed the deductions. I once set the requested 401k deductions too high. I noticed there was no 401k contribution for one paycheck. Payroll checked, and informed me that my deduction request was a little more than my take-home amount. So they could not comply, and did not deduct for 401k at all.
JediMisty
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Re: 401k contribution percentages greater than take home pay for a single paycheck, how will funds be distributed?

Post by JediMisty »

The reply that ReadyOrNot gave you is what will most likely happen. But that doesn't solve your issue.

If your plan "allows" for up to 85% contributions (mine had allowed up to 90%), you can make adjustments to your withholding to get in higher amounts into your 401k. I assume you are doing this to max out your contributions early in the year, perhaps because you expect to retire or be laid off. As other posters noted, you are well advised to understand how your match works so that you don't leave money on the table, tax free, that your employer would have provided. In my case, I had my withholding set to a dozen or so dependents to minimize the taxes being taken out to leave me more space. This meant I had to calculate and send in quarterly taxes to the IRS and state authorities. I did this for the last couple of years, effectively living off savings in the first several months of the year.
I had to make sure that all the paychecks of the year would have at least 5% to get the company match. This was not an issue until early June, when I had to start figuring out how long I would be working. I expected to be laid off in 2020, which was postponed until 2021, and I was.
In my 401k plan (Vanguard admin), we had to specify how much of each category was to be contributed" pre-tax, Roth, and after-tax were all boxes that had to be checked. A blanket of "85%" wasn't a choice.
rankl
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by rankl »

forouronekay wrote: Thu Nov 25, 2021 4:47 pm The question is about what happens when my contribution percentages set in Fidelity (85%) *for one paycheck* is greater than my gross pay minus withholdings (such as taxes) *for that paycheck*. If my take home pay is only 70%, how will that 70% be distributed across the 401k types?
All your 85% allocation do not come from gross pay.

For e.g., if you gross pay for month is $100

You will pay taxes (fed, state, Med, SS) - 30% = $30,

Then insurance (Pre tax deductions) - 5%= $5

trad 401K - 40% (your election) = $ 40

Left in pay check, $100 - 30 - 5 - 40 = $25

Roth 401k - 40% (this 40% comes from $25) = $10

after tax 401k - 5% (this 40% comes from $25) = $1.25

Left in pay check $25 - 10 - 1.25 = $13.75
KlangFool
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by KlangFool »

forouronekay wrote: Thu Nov 25, 2021 1:07 pm

3) As to why I would contribute more than my take home pay, I am hoping that Fidelity will prioritize pre-tax, then Roth, then after-tax, so whatever’s left over will go to after-tax and I don’t need to crunch the numbers for the exact percentage. 40/40/5 is a perhaps bad example in retrospect, let’s say 20/20/45. I basically want pretax and Roth to be funded in full, and the leftover amount to go into after-tax.
forouronekay,

<<I am hoping that Fidelity will prioritize pre-tax, then Roth, then after-tax, >>

My 401K plan allowed for contribution up to 100% of my gross pay. It does not work in the way that you assume.

The only accurate answer that you can get is to call Fidelity and ask that question. If they cannot answer, then, call you payroll department.

The rule is specific to each 401K as per the employer's implementation of that plan.

KlangFool
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KlangFool
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Re: 401k contribution percentages greater than take home pay, how will funds be distributed?

Post by KlangFool »

rankl wrote: Fri Nov 26, 2021 8:13 am
forouronekay wrote: Thu Nov 25, 2021 4:47 pm The question is about what happens when my contribution percentages set in Fidelity (85%) *for one paycheck* is greater than my gross pay minus withholdings (such as taxes) *for that paycheck*. If my take home pay is only 70%, how will that 70% be distributed across the 401k types?
All your 85% allocation do not come from gross pay.

For e.g., if you gross pay for month is $100

You will pay taxes (fed, state, Med, SS) - 30% = $30,

Then insurance (Pre tax deductions) - 5%= $5

trad 401K - 40% (your election) = $ 40

Left in pay check, $100 - 30 - 5 - 40 = $25

Roth 401k - 40% (this 40% comes from $25) = $10

after tax 401k - 5% (this 40% comes from $25) = $1.25

Left in pay check $25 - 10 - 1.25 = $13.75
rankl,

In my plan, it is actually based on percentage of gross pay. So, as per your example, It would be $85. Since the taxes = $30, it would stop at around $50. Aka, whatever numbers ended up with a $0 paycheck.

We cannot assume anything. It is all dependent on specific 401K plan.

KlangFool
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Topic Author
forouronekay
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Joined: Wed Nov 24, 2021 10:45 pm

Re: 401k contribution percentages greater than take home pay for a single paycheck, how will funds be distributed?

Post by forouronekay »

Yes, it is based on gross pay for me as well.

Seems like I need to ask my employer how their plan will work and then adjust accordingly.

Thanks all for the discussion.
ryman554
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Re: 401k contribution percentages greater than take home pay for a single paycheck, how will funds be distributed?

Post by ryman554 »

forouronekay wrote: Sat Nov 27, 2021 2:42 am Yes, it is based on gross pay for me as well.

Seems like I need to ask my employer how their plan will work and then adjust accordingly.

Thanks all for the discussion.
Great! Please let us know what you find out.

Now, can you explain what it is you are trying to accomplish with your "complicated" allocations?

Others have hinted that your strategy may be suboptimal.
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