Author Topic: 401k Failed Discrimination Testing  (Read 3737 times)

dillon

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401k Failed Discrimination Testing
« on: February 24, 2012, 09:58:08 AM »
Both my spouse and I work for the same small business.  We both contributed the maximum amount to our 401k, but no one else really did, so we failed the discrimination testing (bunch of bs...but that is another topic).  We are getting back roughly 12k a piece that we will have to pay taxes on now.  Roughly 7k in taxes total (ouch!).  What I am wondering is what to do for the future?  We want to retire early and the bad thing with the 401k is we cannot touch that until we are 59.5, but also that is a benefit.  We make too much to contribute to a Roth IRA and I know we could contribute to a Traditional and then immediately transfer it to a Roth, but is that the best idea?  And what should we do with the rest of the money?  Or should we do something else?  The great thing is that we didn't see this money, it just went right to retirement.  Obviously we need to stop maxing out our 401k's but where should we put that money and how can I do it so we don't think about what we could have spent that money on?

JohnGalt

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Re: 401k Failed Discrimination Testing
« Reply #1 on: February 24, 2012, 02:20:05 PM »
Are you and your wife the business owners? ie do you have control over what type of 401k plan you use?

I don't know all of the nuances, but I've done some research on small business 401k options as I'm trying to get my company to switch (I am not the owner/decision maker) and there are options to get around the discrimination testing. 

Safe Harbor 401k -http://www.dol.gov/ebsa/publications/401kplans.html
"Traditional 401(k) plans are subject to annual testing to assure that the amount of contributions made on behalf of rank-and-file employees is proportional to contributions made on behalf of owners and managers. In most cases, safe harbor 401(k) plans are not subject to annual nondiscrimination testing."

There also might be other options like simple or SEP IRA -https://www.usaa.com/inet/pages/ira_simple_vs_sep

dillon

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Re: 401k Failed Discrimination Testing
« Reply #2 on: February 24, 2012, 03:04:34 PM »
We are not the owners and the owner doesn't match and so therefore doesn't want to do the safe harbor plan