Extreme 401k savings

[Theta]

Hi, longtime lurker with a question on extreme 401k savings limits.

According to the IRS, an individual can contribute a maximum of $18,000 in 2016 to their 401k. However, through employee matching or contributions this maximum can be up to $53,000 (employer contributes $35,000). My main question: is it possible to obtain this maximum on a yearly basis? What limits this from being possible?

Here’s an example for you gurus to pick apart:

“Joe” is single, employed at a small business with fewer than 40 employees and makes an annual income of $80,000. His employer has no 401k program and he is located in a highly taxed state. He’s in the 25% tax bracket and pays about 10% to the state. By maxing out his individual and company match to the maximum $53,000, he would save roughly $18,000 in taxes and be in the 15% tax bracket. With these savings he could offer to pay the fee’s to start and maintain the 401k program for about $4,000 per year and still come out ahead in tax savings. He could happily live on the $27,000 taxed income per year and retire much quicker than with no 401k at all.

I haven’t found any articles like this with an internet search. Is this possible? Is there a way to rewrite this example to be entirely realistic while still being legal?

Thanks

[Jim2001]

Theta,

I see a challenge with Joe convincing the company to create the "match" out of thin air?  If it is offered to one employee, it must be offered to all, so even if Joe is willing to take the match in lieu of base pay, it is likely his co-workers aren't in the same boat.    Ignoring that, it can't hurt to ask the company to set up the 401k, since they may not realize they don't need to offer a match.  That would lower the taxable income more than just an IRA.  I asked my company to add a Roth option last year and they were able to at no additional cost.

[seattlecyclone]

One way that many people do run into the $53k limit is through the use of traditional after-tax contributions. It's up to the plan whether to allow these or not, but if they are allowed you can do what's also called the "mega backdoor Roth" since the amounts in question can be rather large.

Self-employed people can start solo 401(k) plans that go all the way up to $53k as well.

As for a larger employer getting to this limit through matching...I don't see why it wouldn't be allowed, but Jim brings up a good point that the matching has to be the same for everyone in the plan, which could complicate things a bit if there were lower-earning employees who might not have anything left over at all after all their salary is now diverted into the 401(k) instead.

[teen persuasion]

One way that many people do run into the $53k limit is through the use of traditional after-tax contributions. It's up to the plan whether to allow these or not, but if they are allowed you can do what's also called the "mega backdoor Roth" since the amounts in question can be rather large.

Self-employed people can start solo 401(k) plans that go all the way up to $53k as well.

As for a larger employer getting to this limit through matching...I don't see why it wouldn't be allowed, but Jim brings up a good point that the matching has to be the same for everyone in the plan, which could complicate things a bit if there were lower-earning employees who might not have anything left over at all after all their salary is now diverted into the 401(k) instead.

Argh, angry bears ate my post!  Let's try again.

Of course, after-tax contributions would not reduce your tax burden at all NOW.  Future tax could be zero on Roth withdrawals if you do the mega backdoor Roth however.

[maizefolk]

As others have pointed out, the company cannot match your salary or do profit sharing contributions to your account without also making equivalent contributions or matches available to other employees.

Worse, even if Joe convinces his employer to make him an independent contractor and pay him the same income* as 1099 income rather than W-2, allowing him to start a fund a no-fee solo 401k, his maximum contribution would be only $18k employee contribution + ~$16 "company match" (~20% of his $80k income) = $34k/year. In order to hit the maximum total contribution limit for a 401k, Joe would need to bring in ~$175k/year in self employment income.

*Actually Joe should be able to convince his employer to pay him a bit more as an independent contractor since he'll presumably need to buy his own health insurance and will have to pay the extra payroll taxes that are currently carried by his employer.