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I dont understand 401k employee contribution limits

Home Retirement Accounts I dont understand 401k employee contribution limits

  • Avatar ThruTheForrest
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    Status: Dentist
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    so my wife has a 401k through her hospital.  we have “maxed” out every year as per employee contribution limitations.  however, i have been reading everywhere that the limit for 401k’s is 55k.  IE: https://www.whitecoatinvestor.com/multiple-401k-rules/#comment-512538 i read this last week and i have been picking my brain as rule #1 and rule #2 are literally contradictory.  i dont understand how you can have a max employee contribution of 16k, and turn right around in the next part and say just make it 55k.  can you add after tax dollars to the 401k?  im very new to this and this makes ZERO sense to me.  can some one please lift the fog for me?

    #180216 Reply
    Avatar Peds
    Moderator
    Status: Physician
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    Joined: 01/08/2016

    there are two parts. employee and employer.

    its 56 total.

    they have their own set of rules.

    if she is W2 then you are limited to whatever your employer will match or if the program allows after tax contributions with in service distributions.

    #180218 Reply
    Avatar ThruTheForrest
    Participant
    Status: Dentist
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    Joined: 01/09/2019

    i understand the two parts: of employee and employer.  what i dont understand is if the max is 55k, what does the max of 18.5k actually mean?

    Rule # 1 One Employee Contribution Total

    The IRS only allows you to make a total of $18,500 ($24,500 if 50 or over) worth of “employee contributions” to all of your 401(k)s (or 403(b)s) no matter how many unrelated employers you have. If you have access to two 401(k)s, you can split this up, but the total must be $18.5K ($24.5K if over 50) or less.

    and then the very next things is:

    Rule # 2 $55K Per Unrelated Employer

    The IRS also only allows you and your employer (which might also be you) to put a total of $55,000 per year into a 401(k). This includes the employee contribution, any match from the employer, and any employer contributions.

     

    so what is it?  these two statements contradict each other.  i just feel my wife is leaving a lot of money on the table to be put away.

    #180219 Reply
    Avatar Peds
    Moderator
    Status: Physician
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    Joined: 01/08/2016
    i understand the two parts

    Click to expand…
    these two statements contradict each other.

    Click to expand…

    you dont.

    and they dont.

    #180227 Reply
    Liked by Lordosis, ZZZ, Zaphod, abds
    CordMcNally CordMcNally
    Participant
    Status: Physician
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    Joined: 01/03/2017

    The statements aren’t contradictory. This looks like it is for 2018 so we’ll just use those numbers for simplicity. The “employee contributions” is just that. That’s how much your wife can put in. The $55k includes the max employee contribution but can also include the employer match plus any other employer contributions (such as profit sharing). Using the 2018 numbers, she could contribute $18.5k for her max employee contribution and the employer could contribute an additional $36,500 in the form of employer match and/or profit sharing. Those numbers are now $19k and $56k for 2019.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #180228 Reply
    Avatar Bmac
    Participant
    Status: Physician
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    Joined: 10/21/2017

    If you are a W-2 employee, Rule #1 applies to your employEE contributions. Your employER may match your employEE contributions and do additional profit-sharing or other involuntary contributions to the 401k up to the Rule #2 totals. This is completely determined by your employER. Some only match to a variable percentage of employEE contributions and others are much more generous with profit-sharing, etc. and get to the large annual total amounts. However, the individual employEE can not contribute anything more than noted in Rule #1.

    The ability for the employEE to contribute more than in Rule #1 is if the employER IS the employEE (that is, self-employed, 1099 income, with an individual 401k).

    I hope that clarifies it for you. You would need to check specifically with your wife’s employer 401k plan as far as what is offered for match, etc.

    #180229 Reply
    Avatar ThruTheForrest
    Participant
    Status: Dentist
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    Joined: 01/09/2019

    If you are a W-2 employee, Rule #1 applies to your employEE contributions. Your employER may match your employEE contributions and do additional profit-sharing or other involuntary contributions to the 401k up to the Rule #2 totals. This is completely determined by your employER. Some only match to a variable percentage of employEE contributions and others are much more generous with profit-sharing, etc. and get to the large annual total amounts. However, the individual employEE can not contribute anything more than noted in Rule #1.

    The ability for the employEE to contribute more than in Rule #1 is if the employER IS the employEE (that is, self-employed, 1099 income, with an individual 401k).

    I hope that clarifies it for you. You would need to check specifically with your wife’s employer 401k plan as far as what is offered for match, etc.

    Click to expand…

    thank you!  this is what i wanted to know.  i was not aware that employers were generous enough to give such a substantial amount of money towards an employee’s 401k.  my wife hospital has a small % match and thats it. so i was confused on how to get to that 55k number max.  i thought it was as easy as just putting the money in there.  im trying to learn how all this works bc i own my office now and am wanting to start a 401k through that.  and now i would assume, as an employer to my self, my office could make up the difference after i maxed out my contribution as an employee?  is that how that works?

    #180232 Reply
    DMFA DMFA
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    Status: Physician
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    Joined: 06/24/2016

    Stop.  You don’t understand.  It’s OK.  It can be a little tricky.  The first part of learning things is recognizing that you do not know something.  Money, like medicine, is more about epistemology (realizing the limits of one’s knowledge) more than it is about what one person actually knows, because when one realizes one doesn’t know something, one can simply, y’know, Google it.

    Here are the limits which govern qualified defined contribution plan – 401(k), 403(b), TSP – for 2019:

    • §402(g) – $19,000 – employee elective deferrals (or designated Roth contributions) to *all* QDCPs *combined*.
      • If you max it at one job, you can’t make elective deferrals at another job; however, you can still have other contributions to the plans.
    • §415(c) – $56,000 – sum of all contributions *per* unrelated employer/group.  This includes employee elective/Roth, employee non-Roth after-tax, and employer match/profit-sharing/non-elective contributions.
      • If you are self-employed, such as a side job, then you are your own employer/group and as such have your own §415(c) limit separate from your employer.
      • 403(b) accounts are aggregated with the person (instead of the employer) for some silly reason, so it counts toward your self-employed §415(c) limit
    • §414(v) – $6,000 – “catch-up” deferrals for those over 50.  This is only if you max the 19K limit.  This is allowed beyond the 56K limit.
    • §401(a)(17) – $280,000 (or 5x the §415(c) limit) – maximum compensation which can be used to figure employer percentage-based contributions
      • For example, if there’s 10% profit-sharing, and you earn $300,000, then they can only contribute 10% * 280,000 = $28,000
      • Self-employed cannot contribute more than 20% of net profit (or 25% compensation; same number since it’s still 20/80) as employer contribution

    457(b) plans are *not* qualified plans; their limit is separate from but equal to the §402(g) limit.  Also, 401(a) and self-employer SEP-IRAs are also subject to §415(c), but they do not have employee elective deferrals.  So those who have the 403(b)/457(b)/401(a) stack, since the 403(b) is not aggregated to the employer and 457(b) isn’t a qualified plan, can max 19K/19K/56K for $94K.

    So sure, one can “max” their 401(k) from *their* end at the $19,000 §402(g) limit…but unless the employer has robust contributions (match, profit-sharing, non-elective contributions), they won’t get to the $56,000 §415(c) limit.

    Now, if *you’re* your own employer and you control your own one-participant 401(k), then you can put in as much as you can as an employer (20% net profit after half self-employment tax), meaning you can max a 401(k) with 37K * 5 = $185,000 in net profit after half SE tax (or employer FICA if S-corp) since the 19K doesn’t count against that.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #180236 Reply
    Avatar Bmac
    Participant
    Status: Physician
    Posts: 318
    Joined: 10/21/2017

    If you are a W-2 employee, Rule #1 applies to your employEE contributions. Your employER may match your employEE contributions and do additional profit-sharing or other involuntary contributions to the 401k up to the Rule #2 totals. This is completely determined by your employER. Some only match to a variable percentage of employEE contributions and others are much more generous with profit-sharing, etc. and get to the large annual total amounts. However, the individual employEE can not contribute anything more than noted in Rule #1.

    The ability for the employEE to contribute more than in Rule #1 is if the employER IS the employEE (that is, self-employed, 1099 income, with an individual 401k).

    I hope that clarifies it for you. You would need to check specifically with your wife’s employer 401k plan as far as what is offered for match, etc.

    Click to expand…

    thank you!  this is what i wanted to know.  i was not aware that employers were generous enough to give such a substantial amount of money towards an employee’s 401k.  my wife hospital has a small % match and thats it. so i was confused on how to get to that 55k number max.  i thought it was as easy as just putting the money in there.  im trying to learn how all this works bc i own my office now and am wanting to start a 401k through that.  and now i would assume, as an employer to my self, my office could make up the difference after i maxed out my contribution as an employee?  is that how that works?

    Click to expand…

    I want to say yes, but having never been self-employed or owned my own office, I don’t really know all the details of what is involved in order to set up and individual or small office 401k plan. Hopefully others can fill in those details.

    #180239 Reply
    DMFA DMFA
    Moderator
    Status: Physician
    Posts: 2136
    Joined: 06/24/2016

    If you are a W-2 employee, Rule #1 applies to your employEE contributions. Your employER may match your employEE contributions and do additional profit-sharing or other involuntary contributions to the 401k up to the Rule #2 totals. This is completely determined by your employER. Some only match to a variable percentage of employEE contributions and others are much more generous with profit-sharing, etc. and get to the large annual total amounts. However, the individual employEE can not contribute anything more than noted in Rule #1.

    The ability for the employEE to contribute more than in Rule #1 is if the employER IS the employEE (that is, self-employed, 1099 income, with an individual 401k).

    I hope that clarifies it for you. You would need to check specifically with your wife’s employer 401k plan as far as what is offered for match, etc.

    Click to expand…

    thank you!  this is what i wanted to know.  i was not aware that employers were generous enough to give such a substantial amount of money towards an employee’s 401k.  my wife hospital has a small % match and thats it. so i was confused on how to get to that 55k number max.  i thought it was as easy as just putting the money in there.  im trying to learn how all this works bc i own my office now and am wanting to start a 401k through that.  and now i would assume, as an employer to my self, my office could make up the difference after i maxed out my contribution as an employee?  is that how that works?

    Click to expand…

    Cool!

    See wat I just posted above.  I was typing that while you were posting, and you beat me to the punch 🙂

    EDIT: if you have employees, then you will have to meet “qualifications,” meaning you’ll have to contribute the same percentage to your employees as you do to yourself.  Since this is usually very costly for you to do if you want to make large contributions, you’re usually stuck with either a SIMPLE-IRA or “safe-harbor” 401(k) as a retirement plan, which usually “match” about 3%.  You can only use a one-participant 401(k) if the only business member is you, or you and a spouse since you’re considered a single unit but would still have your own limits.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #180241 Reply
    Avatar ogbutch
    Participant
    Status: Other Professional
    Posts: 1
    Joined: 07/31/2019

    Employees can contribute $19k either Pre-tax 401k or Roth 401k, and there is an overall limit of 56k currently to be the combination of the employee and employer. However, some information I have not seen above that you can also do is that you can contribute above the 19k to your 401k in an after tax capacity.

    For example, let’s say you contribute your $19k Pre-tax into your 401k (to minimize and defer your tax obligations) and your employer does a match totally $7k. That would leave a difference in your $56k 401k max of $30k. Many employers allow for you either to elect a spill over option (where the money over the max employee contribution, the $19k, automatically goes into your 401k as after tax contributions), or you can set two different contribution percentages at the beginning of the year (Pre-tax percentage, towards the $19k, and an After-Tax percentage, towards the $30k). This would allow you to maximize your 401k contributions and make up the difference in the $56k the employers does not make.

    Additionally, any money you contribute into the 401k as after tax (towards the $30k) can be converted into a Roth IRA and shelter any money those investments make from future taxes. This is what is known as a back door IRA.

    #235273 Reply
    Avatar jacoavlu
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2465
    Joined: 03/01/2018

    Many employers allow for…

    Click to expand…

    “Many” is open to interpretation but I would confidently say that it is a minority of plans that allow for voluntary employee after tax contributions. Particularly when it comes to medical group plans. It is a great feature when available, but especially among small or even medium size practices where contributions from highly compensated employees significantly outweigh contributions from non highly compensated employees, the option for after tax contributions is usually not available because of the hurdle of passing the ACP nondiscrimination testing.

    Additionally, any money you contribute into the 401k as after tax (towards the $30k) can be converted into a Roth IRA and shelter any money those investments make from future taxes. This is what is known as a back door IRA.

    Click to expand…

    Correction that this process is known as the “mega backdoor Roth IRA” and is usually, but not always, available in plans that allow after tax contributions. To be able to rollover to Roth IRA, the plan must allow for in service non hardship withdrawals.

    The same “mega backdoor Roth” can be accomplished if the plan allows for in plan Roth rollover.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #235316 Reply
    Liked by childay, Peds
    Avatar Peds
    Moderator
    Status: Physician
    Posts: 4715
    Joined: 01/08/2016
    Additionally, any money you contribute into the 401k as after tax (towards the $30k) can be converted into a Roth IRA and shelter any money those investments make from future taxes. This is what is known as a back door IRA.

    Click to expand…

    its not.

     

    also this is a 6mo old thread.

     

    welcome.

    #235318 Reply
    Liked by childay

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