Income Limits on IRA, 401k, and HSA Max Out?

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Road2Wealth
Posts: 5
Joined: Thu Dec 15, 2016 5:57 pm

Income Limits on IRA, 401k, and HSA Max Out?

Post by Road2Wealth » Fri Sep 28, 2018 7:25 pm

Hi all. I'm about to start a job where my salary is $180K. My plan was to max out all my retirement accounts –– $19K for 401k, $6K for IRA, and $3.5K for HSA -- when I starting earning this high salary. But someone told me that I might not be able to max out both my 401k and IRA (for a total of $25K in tax-advantaged accounts) because there are limits imposed by law. I did some googling and found that there are some limits which are income dependent, and I exceed all those limits. At the same time, however, I've found multiple articles for personal finance planning instructing you to max out all these accounts first. So I'm curious what I'm missing.

I do understand that there are income limits for Roth IRA, which I exceed with $180K. But I also understand that doing a "backdoor Roth" is straightforward and not prohibited, which is what I intended to do for my IRA savings.

However, are there any limits for maxing out my 401k and traditional IRA for a total of $25,000 pre-tax? Can I go ahead and budget $28,500 from my annual salary to max out all these retirement accounts.

Thanks for your advice.

sailaway
Posts: 371
Joined: Fri May 12, 2017 1:11 pm

Re: Income Limits on IRA, 401k, and HSA Max Out?

Post by sailaway » Fri Sep 28, 2018 7:33 pm

The 401k limits are not hard limits, but mean that the plan is subject to testing. In other words, the limit depends on the details of your plan. Your HR department or plan administrator should know. Additionally, your employer may have percentage restrictions that mean you cannot start making until next year, but given the contributions you listed, it looks like that was your plan anyway.

Your IRA will likely not be deductible, but you can make a non traditional IRA contribution and convert it to Roth, saving you taxes on the growth. (The backdoor Roth you mention). I mention this because you seem to be calculating $25k pretax, when in fact these funds will be post tax.

I am not aware of income limits for HSA, just plan restrictions.

money_bunny
Posts: 23
Joined: Tue Dec 20, 2016 9:33 pm

Re: Income Limits on IRA, 401k, and HSA Max Out?

Post by money_bunny » Fri Sep 28, 2018 7:49 pm

Road2Wealth wrote:
Fri Sep 28, 2018 7:25 pm
$19K for 401k, $6K for IRA,
Did I miss a change? I thought it was $18000 for 401K's and $5500 for IRA's.

Road2Wealth
Posts: 5
Joined: Thu Dec 15, 2016 5:57 pm

Re: Income Limits on IRA, 401k, and HSA Max Out?

Post by Road2Wealth » Fri Sep 28, 2018 8:09 pm

money_bunny wrote:
Fri Sep 28, 2018 7:49 pm
Road2Wealth wrote:
Fri Sep 28, 2018 7:25 pm
$19K for 401k, $6K for IRA,
Did I miss a change? I thought it was $18000 for 401K's and $5500 for IRA's.
The amounts I posted are for 2019.

Thank you to the first poster. I guess I was unaware of a third IRA category -- a "non-traditional IRA" (but not a Roth IRA) -- which is where I"ll have to put my after-tax dollars before converting them into a backdoor Roth.

So ultimately my pre-tax savings will be $22,500 (401(k) + HSA), and then $6K will be after-tax.

CppCoder
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Joined: Sat Jan 23, 2016 9:16 pm

Re: Income Limits on IRA, 401k, and HSA Max Out?

Post by CppCoder » Fri Sep 28, 2018 8:35 pm

money_bunny wrote:
Fri Sep 28, 2018 7:49 pm
Road2Wealth wrote:
Fri Sep 28, 2018 7:25 pm
$19K for 401k, $6K for IRA,
Did I miss a change? I thought it was $18000 for 401K's and $5500 for IRA's.
Yes, you apparently missed 2018, as the 401(k) limit for this year is $18,500. Increases for next year are still projections until the official announcement in, I believe, October.

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

Re: Income Limits on IRA, 401k, and HSA Max Out?

Post by Spirit Rider » Fri Sep 28, 2018 11:07 pm

Road2Wealth wrote:
Fri Sep 28, 2018 8:09 pm
Thank you to the first poster. I guess I was unaware of a third IRA category -- a "non-traditional IRA" (but not a Roth IRA) -- which is where I"ll have to put my after-tax dollars before converting them into a backdoor Roth.
The reason you were not aware of it is because there are only two types of IRA accounts. The original IRA is now called a "traditional" IRA to distinguish it from a Roth IRA.

If your MAGI is greater than the IRA deduction limit you can not make a deduction. A contribution in this case becomes a non-deductable contribution to a traditional IRA.

Lyrrad
Posts: 39
Joined: Sun Jul 27, 2008 10:59 am

Re: Income Limits on IRA, 401k, and HSA Max Out?

Post by Lyrrad » Sat Sep 29, 2018 12:46 am

Road2Wealth wrote:
Fri Sep 28, 2018 7:25 pm

However, are there any limits for maxing out my 401k and traditional IRA for a total of $25,000 pre-tax? Can I go ahead and budget $28,500 from my annual salary to max out all these retirement accounts.
Here's my understanding for 401(k) contribution restrictions for those that make a lot of money:

401(k) plans try to avoid failing nondiscrimination testing, which means that Highly Compensated Employees (HCEs) contribute more than 2% of their income under the compensation limit than non-HCEs. When this happens, the plan typically either restricts contributions by HCEs, returns contributions to HCEs (in the following year), or makes qualified nonelective contributions for non-HCEs. Plans may choose to become a safe harbor plan to avoid this testing (by offering matching or nonelective contributions).

See this IRS article for how HCEs are identified. Basically it's usually either the top 20% of employees, or compensation of over $120,000 (2018, adjusted for inflation) in the previous year.

Based on your post, I think it's unlikely you'd be subject to the HCE restrictions in 2018 or 2019 unless you or a family member owns more than 5% of the business (Ownership test), since it's based on your compensation during the previous year. For 2020, if the plan fails nondiscrimination testing and you're HCE, your contributions may be restricted or you could have some contributions returned.

My guess is that your employer's plan will communicate any limits on contributions, but I don't think you'd need to worry about this until 2020 unless you or a family member owns more than 5% of the company.

bada bing
Posts: 63
Joined: Fri Sep 09, 2016 10:45 am

Re: Income Limits on IRA, 401k, and HSA Max Out?

Post by bada bing » Sat Sep 29, 2018 7:05 am

Congrats on the new job.

With a few caveats, you should be able to contribute the limits you posted - and perhaps more.

The IRA is pretty simple. You can't get a deduction for the contribution and you make
too much money to contribute directly to a Roth. As you mentioned, the backdoor Roth
is a simple end-around which is easy and perfectly legal. It makes you wonder why the
IRS has specifically blessed the backdoor Roth in opinion letters and yet it is not permitted
to just deposit directly into a Roth. The one big caveat though, is that if you have pre-tax
money in any version of IRA you will be subject to pro-rata calculations. The easiest way
to deal with it if you have such balances is to see if your new 401k accepts roll ins from IRAs.

The 401k contributions will probably be straightforward. The issue of being an HCE was
brought up. One way to tell if this might be an issue is to check the match you are offered.
If it is 3% or more, the plan is almost certainly a safe harbor and HCE rules won't apply. The one
potential extra may be the ability to make after-tax contributions to your 401k and then do an
in-service roll over aka "mega-backdoor Roth". If your plan allows this, it gives you the ability
to shelter more savings every year in a Roth. It isn't super common that plans allow it, but it
isn't a unicorn either. More plans add the ability as time goes on and it wouldn't hurt to request it
if you're interested but your plan doesn't have it.

The HSA should be straight forward. Just remember that HSA limits are apportioned over time and
you have to be covered by a HDHP for the whole year to use the whole contribution limit.

jayk238
Posts: 439
Joined: Tue Jan 31, 2017 1:02 pm

Re: Income Limits on IRA, 401k, and HSA Max Out?

Post by jayk238 » Sat Sep 29, 2018 9:39 am

Road2Wealth wrote:
Fri Sep 28, 2018 7:25 pm
Hi all. I'm about to start a job where my salary is $180K. My plan was to max out all my retirement accounts –– $19K for 401k, $6K for IRA, and $3.5K for HSA -- when I starting earning this high salary. But someone told me that I might not be able to max out both my 401k and IRA (for a total of $25K in tax-advantaged accounts) because there are limits imposed by law. I did some googling and found that there are some limits which are income dependent, and I exceed all those limits. At the same time, however, I've found multiple articles for personal finance planning instructing you to max out all these accounts first. So I'm curious what I'm missing.

I do understand that there are income limits for Roth IRA, which I exceed with $180K. But I also understand that doing a "backdoor Roth" is straightforward and not prohibited, which is what I intended to do for my IRA savings.

However, are there any limits for maxing out my 401k and traditional IRA for a total of $25,000 pre-tax? Can I go ahead and budget $28,500 from my annual salary to max out all these retirement accounts.

Thanks for your advice.
Since no one brought this up i will tell you that the max that employeer can contribute to is 270k. This means that if u have a 3 or 5 or 6% match and make 600k only 270 of it can be used to calculate match. I know this because i will be dealing with this issue shortly

Spirit Rider
Posts: 8686
Joined: Fri Mar 02, 2007 2:39 pm

Re: Income Limits on IRA, 401k, and HSA Max Out?

Post by Spirit Rider » Sat Sep 29, 2018 11:49 am

jayk238 wrote:
Sat Sep 29, 2018 9:39 am
Since no one brought this up i will tell you that the max that employeer can contribute to is 270k. This means that if u have a 3 or 5 or 6% match and make 600k only 270 of it can be used to calculate match. I know this because i will be dealing with this issue shortly
What you are referring to is the compensation limit. Which is actually $275K for 2018 and will most likely be $280K for 2019.

Road2Wealth
Posts: 5
Joined: Thu Dec 15, 2016 5:57 pm

Re: Income Limits on IRA, 401k, and HSA Max Out?

Post by Road2Wealth » Sat Oct 13, 2018 6:37 pm

I wanted to circle back to say that I got it all set up.

On the 401k, I am having $1650 pulled out each month pre-tax. That's more than enough to hit my annual limit (evens out to $19,800, and employer provides no match). I will have to look into the "mega-backdoor Roth" because it sounds attractive. I don't totally understand the importance of the HCE restrictions, but didn't hear anything about it when I received the benefits spiel at work. For now, I plan on not worrying about it.

On the HSA, the employer actually contributes $1200 annually to the HSA, so I only have about $195 pulled out each month pre-tax.

On the Roth IRA, I am auto-transferring $500 per month to a savings account. Once I get the $6000 I will do a backdoor Roth (which I've never done) into my existing Roth IRA account that I manage myself.

Thanks for all the advice. This is my first "real" job, so I really needed help to get the basics set up.

Lyrrad
Posts: 39
Joined: Sun Jul 27, 2008 10:59 am

Re: Income Limits on IRA, 401k, and HSA Max Out?

Post by Lyrrad » Sat Oct 13, 2018 11:54 pm

Road2Wealth wrote:
Sat Oct 13, 2018 6:37 pm
I wanted to circle back to say that I got it all set up.
Note that these are calendar year limits, so if you have the financial flexibility, you can try to maximize your contributions for this year, even though you've started your job most of the way through the year.

My understanding is that elective 401k contributions must be deducted from your paycheck, so you could increase your contributions for the remainder of the calendar year, and change it again for January.

HSA contributions can come either from your paycheck or you can make direct contributions. If you make a direct contribution, the deadline should be around April 15, though you'd need to pay FICA taxes on those contributions, whereas paycheck contribution aren't subject to FICA taxes.

IRA contributions for a year can be made through around April 15 the following year.

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