The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Eric9064 on July 21, 2017, 12:04:07 PM
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I am switching Jobs and will be eligible to participate in my new employers 401(k) plan for about 4 pay cycles (paid twice a month) prior to the end the year. Any contributions I make will be subject to a 6% employer match. Here's the catch: I have already maxed-out my personal contributions to my current 401(k) plan.
I did some research, and it appears there is no penalty for over contributing to a 401(k) plan so long as you correct the issue prior to April 15 of the subsequent year (understanding that I will have to pay normal taxes on the excess amount).
I would love to contribute what I can to my new employer's plan, receive the match, and then correct for my excess contribution following the end of the year. My current 401(k) is with Vanguard and the new 401(k) will be with Fidelity, so I don't think Fidelity will automatically stop me from over contributing.
Any reason that this is not possible or that I shouldn't take advantage of this situation?
Thanks,
Eric
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Interesting. PTF.
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Having trouble finding this exact scenario but see correction step 2 for an "over the $53K limit" issue:
https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-failure-to-limit-contributions-for-a-participant (https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-failure-to-limit-contributions-for-a-participant)
Step 2: Distribute elective contributions (adjusted for earnings) that are matched, and forfeit related matching contributions (adjusted for earnings). If any excess remains, then proceed to Step 3.
Emphasis mine - it makes sense to me that if you have matched elective contributions that have to be returned for whatever reason, that you'd lose the associated match.
I'd hope there is something about this in your plan documents somewhere - seems like a very valid question "If I have excess contribution returned, what happens to the match I received on those contributions?"
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For 4 pay periods, you are talking about creating an administrative nightmare for your new employer to potentially gain 1% of your salary in matching contributions. I would not do that.
Edited to add: I would be concerned about the ability of the employer and 401k administrator to correctly resolve this issue without major headaches.
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One possibility is that you might be able to make "after tax" contributions to your 401k.
https://www.nytimes.com/2015/09/23/your-money/401ks-and-similar-plans/irs-ruling-makes-after-tax-contributions-more-attractive.html
I'd talk to the HR department. You'll be talking with them sooner or later anyway, and you may find out how well they can handle the situation (and how cooperative they'll be).
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
http://www.savingtoinvest.com/check-for-ira-and-roth-ira-excess-contributions-to-avoid-a-6-tax-penalty/