Author Topic: Can I purposely overcontribute to a 401K?  (Read 3813 times)

alaskacobalt

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Can I purposely overcontribute to a 401K?
« on: December 01, 2014, 03:02:09 PM »
I see a lot of similar topics, but didn't get the exact answer I was looking for.  I max out my 401k every year midway through the year, but wanted to know if I could simply contribute to the same plan and just manage it all under the same umbrella?  For example, max out my $18k next year, and then send another $18k to them of my taxed income.  The 401k plan I have has excellent tools and I really like how I have my plan setup so it would be ideal if I could keep my money in one place.  I day trade as well, but that money I'd like to keep separate as I consider that a hobby, not income or part of my retirement at this time.  I started my day trade account with $500 and it is now at $85k, so it is a point of pride to never add to it. 

Scandium

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Re: Can I purposely overcontribute to a 401K?
« Reply #1 on: December 01, 2014, 03:09:55 PM »
I'm a bit confused. So you want to "merge" your 401k and a taxable account? I'm going to say no, I'm pretty sure you can't do that. It'll have to be two different accounts. Although it can obviously be with the same company (Vanguard, schwab etc)

You can use something like personal capital to see your combined allocations

PowerMustache

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Re: Can I purposely overcontribute to a 401K?
« Reply #2 on: December 01, 2014, 03:44:33 PM »
My 401k plan allows me to set up 'back-up after tax' (BUAT) contributions that go into a separate, after-tax bucket of my 401k. My understanding is that this is not a universal feature of 401k and would depend on your employer's specific plan. It was just introduced to our plan this year.  I'm also not clear on what kind of restrictions there are on using the BUAT feature. You may run into trouble if you try to put a huge extra contribution to your 401k.

Based on the 'back up' in the name, I believe the feature is intended to help employees max out on their 401k contribution for the year while still not missing out on any of the employer match.  That's how I am using it personally. I'm not sure exactly how my salary could change over the year, and what sort of bonus I will get. Also, the only lever I have to adjust my contributions is a single % of paycheck number. So it makes sense to set that % a little higher than what I think I'll need to max out the 401k (17.5k this year). Without the BUAT feature, I might miss out on the employer match, since they match my contribution each paycheck.  I set my BUAT at the minimum % of paycheck necessary to get all the employer match so that after I max out the 401k, I don't lose out on the freebies. I think it would work to put my BUAT at a very high %, which is essentially what you're talking about doing, but I haven't asked since I'm not interested.  I believe (but I'm not sure) those after-tax contributions are still subject to the early withdrawal penalties, so that's why I'm not anxious to over-contribute.

I know some other companies wait until the end of the year to see how much you contribute and THEN put in their matching amount, so in that case the BUAT is not necessary/not offered.

alaskacobalt

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Re: Can I purposely overcontribute to a 401K?
« Reply #3 on: December 02, 2014, 03:28:56 PM »
I am basically just trying to keep everything retirement related in one place.  I have several investment accounts that all have different purposes and I like keeping those separate from money that I want to have in retirement.  Once in that retirement account, I know it is off limits, and I wont spend it.  Other investment accounts seem to tempt me more and I feel less of an obligation to maintaining them. 

Sid Hoffman

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Re: Can I purposely overcontribute to a 401K?
« Reply #4 on: December 02, 2014, 04:35:18 PM »
IRS.gov: What if I contribute too much to my retirement plan?

Cliff notes: They will tax you on the excess contribution, tax you again when you withdraw it, possibly hit you with additional penalties, and further possibly disqualify your entire 401k's eligibility to serve as a retirement account in the first place.  They are the government, they will beat you down if you break their rules.

Just put your next $5500 in a Roth account after you hit the $18k limit next year.  Once you hit the max contribution for both your 401k and rIRA, the next possible tax advantaged account would be an HSA if you have a high deductible healthcare plan.  Very possibly you will end up using up all the HSA money during early retirement but if not, it can be used as a regular IRA once you turn 65 and you pay only income tax on the distributions.

This is pretty awesome since the money you contributed to the HSA was exempt from Social Security & Medicare taxes in addition to regular income tax.  HSA is actually the only easy way for a regular employee (as opposed to a small business owner, who can create whatever benefits plans they want) to contribute money for later in life that avoids FICA taxation.  If you use it for qualified medical expenses, that HSA money would actually never be taxed in any way, which is pretty amazing.  I just wish the contribution limits were higher given how expensive healthcare is nowadays.

ZiziPB

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Re: Can I purposely overcontribute to a 401K?
« Reply #5 on: December 04, 2014, 12:33:53 PM »
IRS.gov: What if I contribute too much to my retirement plan?

Cliff notes: They will tax you on the excess contribution, tax you again when you withdraw it, possibly hit you with additional penalties, and further possibly disqualify your entire 401k's eligibility to serve as a retirement account in the first place.  They are the government, they will beat you down if you break their rules.


This is not necessarily true.  First you need to figure out if your plan allows after-tax contributions (request and carefully read a Summary Plan Description for your 401k).  If so, you can contribute up to the IRS max ($52K, I believe, for 2014) which is a combined limit on your pre-tax (or Roth), match and after-tax contributions.  After-tax money (contributions) will not be taxed twice, but gains on the after-tax contributions will be taxed at ordinary tax rates when withdrawn (and subject to the same penalty as other 401k withdrawals if withdrawn before 59 and a half).  If you were to invest the after-tax money through a taxable account, the gains would be taxed at capital gains rates (presumably lower, if long-term).  So generally, you are better off investing that money in a taxable account.  The only exception to that is if your plan allows in-service conversions or rollovers, then you can contribute after-tax dollars and regularly roll them over to a Roth IRA (or convert to Roth 401k if your plan has that option).  That would allow you to convert your after-tax contributions to Roth assets and avoid tax on future gains altogether.

Read up on Mega Backdoor Roth (for example at http://www.bogleheads.org/forum/viewtopic.php?f=1&t=130961&hilit=mega+backdoor  but search for other threads on this topic as well)

ETA: corrected the statement relating to Roth conversions: you will avoid taxes on future gains (post-conversion), but to the extent you have any gains prior to the conversion those would be taxable.
« Last Edit: December 04, 2014, 12:56:47 PM by ZiziPB »

Sid Hoffman

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Re: Can I purposely overcontribute to a 401K?
« Reply #6 on: December 04, 2014, 10:57:35 PM »
^^^^ That's good information.  It's a reminder that there's so many "it depends" going on.  Like for me, my employer plan doesn't allow after tax contributions.  Also for me, being single and with income above the threshold, I can't get the income tax deduction if I put money in a traditional IRA.  If anything, the more time I spend on this forum, the more often I see that the answer to questions is always "it depends".

Scandium

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Re: Can I purposely overcontribute to a 401K?
« Reply #7 on: December 05, 2014, 07:23:00 AM »
I am basically just trying to keep everything retirement related in one place.  I have several investment accounts that all have different purposes and I like keeping those separate from money that I want to have in retirement.  Once in that retirement account, I know it is off limits, and I wont spend it.  Other investment accounts seem to tempt me more and I feel less of an obligation to maintaining them.
Well, then I suggest you work on your self-control instead. That will server you much better in the long run.