How does a layoff impact front-loaded 401K contributions?

[health_concerns]

As of tomorrow, I will have front-loaded $73,500 into retirement plans for 2023:

$22,500 Pre-Tax (401K Contribution)
$7,500 Pre-Tax (Old People 401K Catchup Contribution)
$11,250 Employer Match (401K Contribution)
$32,250 Post-Tax (Contributed to 401K and then "Megabackdoor" rolled to a Roth IRA)

On my paystub, I have ~$85K in gross earnings for 2023, with only a few thousand making it to my bank account: everything else has been withheld or put into my 401K.

If I get laid off tomorrow and don't have any more W2 income in 2023, will I be guilty of overcontributing to my retirement accounts for 2023?

If so, how much will I need in 2023 gross W2 earnings so that the $73,500 retirement contribution is "legal"?

If I have other earnings in 2023 (eg, dividends/interest) -- does any of that "count towards" earnings required to funnel $73,500 of my W2 income to retirement?

Thanks!

[Duckie]

health_concerns, welcome to the forum.

If I get laid off tomorrow and don't have any more W2 income in 2023, will I be guilty of overcontributing to my retirement accounts for 2023?

No. You (not including your employer match) have contributed $62,250 into your work retirement plan. As long as your work income is more than that (and it already is) you are covered.

Plus you can even make a $7,000 backdoor Roth IRA contribution if you have no non-Roth IRAs.

If I have other earnings in 2023 (eg, dividends/interest) -- does any of that "count towards" earnings required to funnel $73,500 of my W2 income to retirement?

No. Dividends / interest are not "earned" income and do not qualify for retirement contributions..

[fyre4ce]

As of tomorrow, I will have front-loaded $73,500 into retirement plans for 2023:

$22,500 Pre-Tax (401K Contribution)
$7,500 Pre-Tax (Old People 401K Catchup Contribution)
$11,250 Employer Match (401K Contribution)
$32,250 Post-Tax (Contributed to 401K and then "Megabackdoor" rolled to a Roth IRA)

On my paystub, I have ~$85K in gross earnings for 2023, with only a few thousand making it to my bank account: everything else has been withheld or put into my 401K.

If I get laid off tomorrow and don't have any more W2 income in 2023, will I be guilty of overcontributing to my retirement accounts for 2023?

I don't think so. The elective deferral ($20,500) and catch-up ($7,500) certainly have no overall income requirement against them. All that's required is they must be less than 100% of your wages, and your plan may have a lower limit, but because you already made these contributions, I don't think it's possible for any rules to be broken if you are laid off tomorrow.

Likewise, the match is calculated based on your plan rules and I don't think it's income-dependent. The match can only be calculated up to $330,000 income, to prevent the match from benefitting the owners and high earners too much, but this rule could only work in your favor if you got laid off partway through the year and had a lower income.

With the post-tax contributions, sometimes there can be non-discrimination testing to make sure the higher earners don't benefit too much from the plan relative to the lower earners. I have heard of cases where after-tax contributions needed to be withdrawn from the plan at the end of the year due to non-discrimination testing. But again, having a lower income for the year because you were laid off would only help you.

I can't think of a reason why getting laid off would cause problems for 401k contributions already made.

If I have other earnings in 2023 (eg, dividends/interest) -- does any of that "count towards" earnings required to funnel $73,500 of my W2 income to retirement?

If so, how much will I need in 2023 gross W2 earnings so that the $73,500 retirement contribution is "legal"?

In short, no. Any income-related issues with your contributions are strictly a function of your income from that employer. Earnings on investments outside your employment have no effect on the plan. The second question is N/A.

For completeness, while front-loading contributions is usually a good idea if your cash flow and savings can support it (it gets the money invested and earning those tax advantages as early as possible), there are a few cautions.

First, some plans are set up such that the match is capped per paycheck. So, you can lose out on match by concentrating contributions in too few paychecks. Some of these plans offer a "true-up" where they chip in whatever is needed to get you to the correct total match for the year early in the next year. But, some don't, and there have been cases of employees losing out on a lot of match for years, without realizing it, by front-loading 401k contributions. It doesn't sound like this is the case for you, because the match is an even 50% of your elective deferral.

Second, if you leave your job mid-year and get a new job that offers a bigger match, you lose out on the new, bigger match because you've already used your elective deferral at the old one.

Third, if you get laid off and need the contributions for your living expenses, they won't be available without penalty until you're at least 59.5, or in some situations, 55. If you are laid off before the year you reach age 55, I don't believe the age 55 rule would apply and you would have to wait until age 59.5. If you have enough other savings to bridge the gap, this would not be a problem.

My sense is that none of these drawbacks apply to you, but they are worth mentioning at least for other readers.

[funxional]

Third, if you get laid off and need the contributions for your living expenses, they won't be available without penalty until you're at least 59.5, or in some situations, 55. If you are laid off before the year you reach age 55, I don't believe the age 55 rule would apply and you would have to wait until age 59.5. If you have enough other savings to bridge the gap, this would not be a problem.

The after-tax contributions (not gains) can be accessed at any time without penalty, correct? If it's still in the 401k the plan documents might limit how the distribution can happen (require full distribution, for example) but if it's been rolled into a Roth IRA the contributions are accessible.

[fyre4ce]

Third, if you get laid off and need the contributions for your living expenses, they won't be available without penalty until you're at least 59.5, or in some situations, 55. If you are laid off before the year you reach age 55, I don't believe the age 55 rule would apply and you would have to wait until age 59.5. If you have enough other savings to bridge the gap, this would not be a problem.

The after-tax contributions (not gains) can be accessed at any time without penalty, correct? If it's still in the 401k the plan documents might limit how the distribution can happen (require full distribution, for example) but if it's been rolled into a Roth IRA the contributions are accessible.

Yes you’re right. If the mega Backdoor roth is rolled out into a Roth IRA, then that money can be accessed according to the normal distribution rules- direct contributions first, then the taxable portion and non-taxable portion of rollovers in chronological order, then gains. If the taxable portions of the rollovers are small, then this is nearly equivalent to them being direct contributions. So in that case, the money should be easily accessible.

[whodidntante]

One potential oopsie is your HSA if you are not covered by an HSA-compatible HDHP for the whole year. It's not a big deal to fix this, however. You just need to command them to return excess contributions.

[w5000]

I've read that the 415(c) limit of $66,000 (the maximum that can be contributed to a 401(k) plan from all sources) is per plan, not per person. So if you get laid off and take another job that has a 401(k) that allows after tax contributions, you can put another $66K of after-tax contributions into that plan!

[mikep]

I've read that the 415(c) limit of $66,000 (the maximum that can be contributed to a 401(k) plan from all sources) is per plan, not per person. So if you get laid off and take another job that has a 401(k) that allows after tax contributions, you can put another $66K of after-tax contributions into that plan!

Source? That's a big one.

[w5000]

I've read that the 415(c) limit of $66,000 (the maximum that can be contributed to a 401(k) plan from all sources) is per plan, not per person. So if you get laid off and take another job that has a 401(k) that allows after tax contributions, you can put another $66K of after-tax contributions into that plan!

Source? That's a big one.

There's a bunch of threads that talk about this, for example:
viewtopic.php?t=202169
(see the third post -- though it just points to the IRS code as the definitive source)

Note that individual contribution limits of (currently $22,500 + $7,000 if over 50) are per person (not per plan).