Reminder: Check your 401K contribution rates

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tadamsmar
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Reminder: Check your 401K contribution rates

Post by tadamsmar »

If your plan is like mine, you need to do "mid-course corrections" to your paycheck contribution rates to ensure that the year's total contribution comes in at the maximum withdrawal limit right on time, not too early. If I hit the max too early, then I will lose my employer match for paychecks at the end of the year that don't contribute at least 4%. If my rate is too low, then I will fail to max out for the year and lose the opportunity for some tax deferral.
Last edited by tadamsmar on Mon Aug 11, 2014 10:16 am, edited 1 time in total.
livesoft
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Re: Reminder: Check your 401K withdrawal rates

Post by livesoft »

Did you mean contribution rates? ;)
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nordsteve
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Re: Reminder: Check your 401K withdrawal rates

Post by nordsteve »

This logic varies based on employer.

Where I work, until CY 2014 the policy was to credit the match for each payroll, based on the contribution rate you had set, regardless of whether you'd hit the max for the year. So, if you hit the max in September, as long as you left the contribution rate >= than that required for a match, they continued to match for the remainder of the year.

They now have simplified things, continuing the match automatically if you hit the contribution maximum, regardless of the contribution rate setting.
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tadamsmar
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Re: Reminder: Check your 401K contribution rates

Post by tadamsmar »

Yes, it's employer dependent. Some plans get rid of the need manage the glide path.
placeholder
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Re: Reminder: Check your 401K contribution rates

Post by placeholder »

Mine switches to after tax with when the deferral limit is reached and matching continues so I put in the maximum allowed (30% this year) and let it ride.
rkhusky
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Re: Reminder: Check your 401K contribution rates

Post by rkhusky »

I just use a fixed dollar amount.
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tadamsmar
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Re: Reminder: Check your 401K contribution rates

Post by tadamsmar »

rkhusky wrote:I just use a fixed dollar amount.
I have to use a whole number percentage amount.
gabriel1970
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Re: Reminder: Check your 401K contribution rates

Post by gabriel1970 »

placeholder wrote:Mine switches to after tax with when the deferral limit is reached and matching continues so I put in the maximum allowed (30% this year) and let it ride.
Do you not prefer all the match is tax deferred?
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Re: Reminder: Check your 401K contribution rates

Post by gabriel1970 »

I researched this when I started working for the current employer. It turns out it intentionally made it such that when my contribution stops after hitting the limit, the match stops.

Now the tricky part is to determine the contribution amount to get $17500 in the last pay period with sufficient amount to get max matching. The reason is that there are two unpredictable bonus payout over the year, which get 401K contribution taken out from. That makes the contribution amount a moving target.
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Don Christy
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Re: Reminder: Check your 401K contribution rates

Post by Don Christy »

Thanks for the reminder. I try to get the most in early, leaving just enough to reach the max in last paycheck to capture full match. It's a PITA every year.
tadamsmar wrote:If your plan is like mine, you need to do "mid-course corrections" to your paycheck contribution rates to ensure that the year's total contribution comes in at the maximum withdrawal limit right on time, not too early. If I hit the max too early, then I will lose my employer match for paychecks at the end of the year that don't contribute at least 4%. If my rate is too low, then I will fail to max out for the year and lose the opportunity for some tax deferral.
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placeholder
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Re: Reminder: Check your 401K contribution rates

Post by placeholder »

gabriel1970 wrote:
placeholder wrote:Mine switches to after tax with when the deferral limit is reached and matching continues so I put in the maximum allowed (30% this year) and let it ride.
Do you not prefer all the match is tax deferred?
Employer contributions are always deferred as they take a deduction for it so really they pass the tax burden onto the recipient (fair enough for free money).
thx1138
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Re: Reminder: Check your 401K contribution rates

Post by thx1138 »

@gabriel1970 - To clarify placeholder is making additional after-tax salary deferrals, the employee match is always pre-tax. You can read more about after-tax (not Roth) contributions to 401k's on the wiki. Not many plans have them and their utility depends on a whole lot of other things being available in your plan (such as in service distributions).

http://www.bogleheads.org/wiki/After-tax_401%28k%29
john94549
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Re: Reminder: Check your 401K contribution rates

Post by john94549 »

My wife is already maxed out at her catch-up. She wonders why, in heaven's name, she is contributing over 20%. I assure her she is helping the economy. Tee Hee.
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Re: Reminder: Check your 401K contribution rates

Post by placeholder »

thx1138 wrote:You can read more about after-tax (not Roth) contributions to 401k's on the wiki. Not many plans have them and their utility depends on a whole lot of other things being available in your plan (such as in service distributions).
The non scientific Bogleheads poll showed more plans offering this than I would have expected (made me feel a bit less special): http://www.bogleheads.org/forum/viewtop ... 1&t=104829
cherijoh
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Re: Reminder: Check your 401K contribution rates

Post by cherijoh »

gabriel1970 wrote:I researched this when I started working for the current employer. It turns out it intentionally made it such that when my contribution stops after hitting the limit, the match stops.

Now the tricky part is to determine the contribution amount to get $17500 in the last pay period with sufficient amount to get max matching. The reason is that there are two unpredictable bonus payout over the year, which get 401K contribution taken out from. That makes the contribution amount a moving target.
Is it the amount that is unpredictable, but with a known date? If that is the case, you should reduce your contribution % before the date of the bonus, to a level to still get the full match but limit the probability that you will run out of contribution space before you run out of pay periods. But it needs to be high enough that if the bonus is smaller than expected, you can still increase your contributions to allow you to hit the max - for companies that put an upper limit on the % contribution to the plan. I have a bonus early in the year where the amount is unknown but the pay period is fixed. It is the same pay period where the annual raise becomes effective, so it is pretty easy to make sure that the contribution rates work out.
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tadamsmar
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Re: Reminder: Check your 401K contribution rates

Post by tadamsmar »

I my case, I have to do the calculations on the pay date (which is a few days after the pay period).

One unknown is the time between when I make the request for a change in the size of my contribution and when that change will take effect. I have to watch my paychecks to see when the change takes effect.

On my last pay date of the year, I must contribute at least 4% and also contribute enough to meet or exceed the limit of 23K (since i get the catch-up).

And, my contribution has to be a whole number percentage.

At least in my case I can leave my bonus out of contribution. I have a predictable paycheck most years since my salary remains fixed except when our contract is renegotiated.
gabriel1970
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Re: Reminder: Check your 401K contribution rates

Post by gabriel1970 »

cherijoh wrote:
gabriel1970 wrote:I researched this when I started working for the current employer. It turns out it intentionally made it such that when my contribution stops after hitting the limit, the match stops.

Now the tricky part is to determine the contribution amount to get $17500 in the last pay period with sufficient amount to get max matching. The reason is that there are two unpredictable bonus payout over the year, which get 401K contribution taken out from. That makes the contribution amount a moving target.
Is it the amount that is unpredictable, but with a known date? If that is the case, you should reduce your contribution % before the date of the bonus, to a level to still get the full match but limit the probability that you will run out of contribution space before you run out of pay periods. But it needs to be high enough that if the bonus is smaller than expected, you can still increase your contributions to allow you to hit the max - for companies that put an upper limit on the % contribution to the plan. I have a bonus early in the year where the amount is unknown but the pay period is fixed. It is the same pay period where the annual raise becomes effective, so it is pretty easy to make sure that the contribution rates work out.
It is the amount that is unpredictable.
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ofcmetz
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Re: Reminder: Check your 401K contribution rates

Post by ofcmetz »

I guess mine is simple. There is no match and I just set the dollar amount per check for the 457B and 403B.
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fungus_amungus
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Re: Reminder: Check your 401K contribution rates

Post by fungus_amungus »

Mine is pretty good, but does have one minor annoyance. I can specify the dollar amount contribution per pay period, but it only lets me go to the the 10 cents place. I get paid twice a month, so initially I tried to divide 17500 by 24 but it wouldn't let me do that. So in order to keep it on autopilot I can only contribute $17498.40 per year. I'm kinda peeved about my missing buck sixty. :P
kermit
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Re: Reminder: Check your 401K contribution rates

Post by kermit »

Ask your employer to fix this broken system. Ours doesn't matter when you contribute. If I front load everything I get the same match I would if I spread it out. Worry-free.
AviN
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Re: Reminder: Check your 401K contribution rates

Post by AviN »

I just increased mine to 80% of my paycheck. I'm performing an experiment to see if I can exceed pre-tax limit and have the remainder go to an after-tax portion of my 401(k). If that works, I'll try to roll it over to a Roth IRA. :D
blurryvision
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Re: Reminder: Check your 401K contribution rates

Post by blurryvision »

tadamsmar wrote:
rkhusky wrote:I just use a fixed dollar amount.
I have to use a whole number percentage amount.
I'm surprised that your company forces you to use a whole number percentage amount. What a huge inconvenience! :oops:

I'm with rkhusky on this one: use a fixed dollar amount. Since I get paid bi-monthly, I just set it to contribute $729.17 per pay period x 24 = $17,500.08. The company takes off the 8 cents at the end of the year.
gabriel1970
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Re: Reminder: Check your 401K contribution rates

Post by gabriel1970 »

blurryvision wrote:
tadamsmar wrote:
rkhusky wrote:I just use a fixed dollar amount.
I have to use a whole number percentage amount.
I'm surprised that your company forces you to use a whole number percentage amount. What a huge inconvenience! :oops:

I'm with rkhusky on this one: use a fixed dollar amount. Since I get paid bi-monthly, I just set it to contribute $729.17 per pay period x 24 = $17,500.08. The company takes off the 8 cents at the end of the year.
I contribute as much as possible at the beginning of the year, only leaving enough to spread out across the rest of year to get maximum matching. I figure the earlier the money is invested, the better.
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Re: Reminder: Check your 401K contribution rates

Post by Garco »

ofcmetz wrote:I guess mine is simple. There is no match and I just set the dollar amount per check for the 457B and 403B.
For my supplemental 403b and my 457b that's what I do (there's no employer match on these funds). This year, in fact, I did the radical thing of taking out >60% of my gross pay for the first several months, and when the "limit" of $23K per year was reached my employer stopped taking it out. Since I am about to retire, I didn't want to run the risk of not maximizing my contributions to these plans this year.
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Re: Reminder: Check your 401K contribution rates

Post by VictoriaF »

I have just changed my TSP contributions to reach the annual maximum during my last week of employment in late September. I had to account for the request date, the next pay-period, and the paycheck date as well as several other factors. It's easy to make a mistake and I am grateful for being able to model it in a spreadsheet.

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placeholder
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Re: Reminder: Check your 401K contribution rates

Post by placeholder »

blurryvision wrote:I'm surprised that your company forces you to use a whole number percentage amount. What a huge inconvenience!
My company does the same but as I just put the maximum allowed percentage it doesn't bother me.
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Re: Reminder: Check your 401K contribution rates

Post by Jack »

placeholder wrote:Employer contributions are always deferred as they take a deduction for it so really they pass the tax burden onto the recipient (fair enough for free money).
The same is true of your salary. The employer takes a tax deduction and you pay the tax.

The tax effect would be exactly the same if, instead of matching contributions, your employer increased your salary and the contribution limit were raised.

With matching, the employer doesn't have to raise everyone's salary -- only for those who make their own contributions.

Edit: Actually there is a difference in some cases. The employee contribution is subject to FICA taxes but the employer contribution is not.
Last edited by Jack on Sat Aug 16, 2014 2:49 pm, edited 1 time in total.
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Garco
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Re: Reminder: Check your 401K contribution rates

Post by Garco »

VictoriaF wrote:I have just changed my TSP contributions to reach the annual maximum during my last week of employment in late September. I had to account for the request date, the next pay-period, and the paycheck date as well as several other factors. It's easy to make a mistake and I am grateful for being able to model it in a spreadsheet.

Victoria
Victoria, that's a real P.I.T.A. I was able to go online to my HR department's website to increase my contribution % to my 403b and 457b for the first five months of 2014, without submitting a justification. I had talked to somebody in HR who confirmed that when I reached the annual contribution limit of $23K on each account for the year, then payroll would just stop contributing. So there was no risk that I would exceed the allowable amount. In fact, I deliberately overshot the target by a percentage point or two, knowing that Payroll would assure that I contributed exactly $23K to each account. It did just that.
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