Author Topic: 401k max contribution and timing of paychecks  (Read 8526 times)

Rubyvroom

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401k max contribution and timing of paychecks
« on: November 01, 2016, 12:17:48 PM »
Hi all! After October ended I decided to do my nearly-end-of-year forecast to see if I'm on track to max out my 401k. As a side note, this is the first year I've maxed out my 401k, so this is probably a noobie question but I thought I'd better ask it in case it helps someone else figure things out.

I had been doing my 401k calculations based on my paycheck date. As everyone likely already knows, there can be a lag between the paycheck date and when the contributions to your 401k are actually deposited. I ran some history on 2016's deposits to see on average how quickly they made these deposits. Throughout the year, the deposits have gone in as early as the same day as my paycheck date and as late as 11 days after my paycheck date. Most recently (the last 4 paychecks) the delay has been 7-8 days. The longest delay (11 days) was early January of 2016 (on a 2015 paycheck), which in my mind makes sense with the holidays mucking up everyone's normal workplace processes and timing.

My last paycheck of the year will be processed/dated Thursday December 22. Knowing that the delay on contributing to my 401k may be between 0 and 11 days (probably closer to 11 given early January of 2016's delay), this could mean the contribution doesn't happen until 2017 and I may under-fund my 401k by one paycheck's contribution.

So my questions...
  • Should I assume my last paycheck's contribution to my 401k happens in 2017 and increase my contributions to ensure I reach $18K without it?
  • What would happen if I followed that strategy, but then magically that paycheck was not delayed and was contributed in 2016 and I went over the limit? I'm assuming the fund manager would just cap me at $18K and not allow the over-contribution, but then I worry I might lose some of my match if my last paycheck's contribution is reduced to next to nothing. (Side note: I have been at one employer all year so this is the only 401k account I have)
  • Logistically, does anyone have a good tip on how to make sure you max your 401k without having to worry about the timing of contributions? What do you all do to make sure you contribute as much as you're allowed to without contributing above the maximum?

Thanks in advance for any advice!

terran

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Re: 401k max contribution and timing of paychecks
« Reply #1 on: November 01, 2016, 12:49:53 PM »
You might want to ask HR to be sure, but I would imagine the contribution will count for the year the paycheck happened in whether it posts to the account or not. What your w2 says is what matters, not when it posts.

GrOW

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Re: 401k max contribution and timing of paychecks
« Reply #2 on: November 01, 2016, 12:58:12 PM »
I do not know for sure. The following is my opinion. I am very interested to see if anyone provides a direct quote or link to an official IRS view on this.

I believe it is your payroll date that matters. The IRS receives your W-2 which contains data for the calendar year. Your 401k contributions is a line/box in your W-2. So a paycheck on 12/31/2016 resulting in a 401k withholding also on 12/31/2016 counts as a 2016 contribution regardless of when the funds are actually deposited into your 401k account.

Rubyvroom

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Re: 401k max contribution and timing of paychecks
« Reply #3 on: November 01, 2016, 01:33:28 PM »
Ok I may be answering my own question here by doing a bit more digging...

In going back to look at my last check for 2015, it was for 12/7 - 12/20 pay period, check dated 12/24. The YTD amounts on this check are what is on my W-2.

Now that last 401k payment for the 12/24 check actually landed in my 401k account on 1/4/16. These funds were reported on  the 2015 W-2 even though they didn't make it into the account until 2016. So I think you all may be correct then, that the paycheck date is what is important, not whatever date the money is contributed to my fund based on whatever processing delay they are experiencing at the time.

Edit: Also important to note here, if I am trying to figure out how much I've contributed to my 401k in 2016, I must then remove the 1/4/16 payment since that was actually reported in 2015. Yes! Further complications that seem super easy to overlook! Ha.

Though it's worth noting that any days I worked between 12/21 and 12/31 were not reported as 2015 earnings, and were the first amounts reported in 2016. I'm sure this is all very well documented somewhere in IRS literature but it's kind of new information to me as I start to be more mindful with my money.

I recently learned more about this delay in fund contributions as I was tallying my 3 paycheck month in September. I saw that 3 checks worth of 401k and HSA payments came out of my money, yet all three 401K and HSA payments did not post in September. It felt like I had money in limbo, mismatched between periods. That money was mine and existed somewhere in the universe, it just didn't exist in any of my accounts yet. It was kind of annoying. It will catch up eventually once they get everything processed (October was only 2 payments as well, so one is still technically in limbo), and I understand that there is actually a defined time limit that these companies have to process payments, but it does make me feel like I have to watch things more closely when a 3 paycheck month does not equal 3 deposits into 401k/HSA.
« Last Edit: November 01, 2016, 01:42:14 PM by Rubyvroom »

ooeei

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Re: 401k max contribution and timing of paychecks
« Reply #4 on: November 02, 2016, 06:17:08 AM »
Now that last 401k payment for the 12/24 check actually landed in my 401k account on 1/4/16. These funds were reported on  the 2015 W-2 even though they didn't make it into the account until 2016. So I think you all may be correct then, that the paycheck date is what is important, not whatever date the money is contributed to my fund based on whatever processing delay they are experiencing at the time.

I did this same analysis recently.  My check was issued 12/30 and the YTD column still showed 2015, even though the deposit wasn't until a few days later.  The pay stub is what goes on record, not the transaction date as far as I know. 

braje

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Re: 401k max contribution and timing of paychecks
« Reply #5 on: November 02, 2016, 10:48:26 AM »
Quote
Edit: Also important to note here, if I am trying to figure out how much I've contributed to my 401k in 2016, I must then remove the 1/4/16 payment since that was actually reported in 2015. Yes! Further complications that seem super easy to overlook! Ha.
My paycheck summary has the amounts I have contributed YTD. The contributions from 2015 pay but deposited in 2016 (EG my 12/31/15 pay).

Rubyvroom

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Re: 401k max contribution and timing of paychecks
« Reply #6 on: November 02, 2016, 11:00:21 AM »
My paycheck summary has the amounts I have contributed YTD. The contributions from 2015 pay but deposited in 2016 (EG my 12/31/15 pay).

Good point. I was pulling my contributions from my 401k administrator website and looking at cash deposits for the year and using that to forecast what my contributions should be to reach the maximum. I should just be looking at my pay stub.

Gotta love the learning curve. I suppose I can't complain. It's a good problem to be struggling to find the best process to max out your 401k... :)

secondcor521

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Re: 401k max contribution and timing of paychecks
« Reply #7 on: November 04, 2016, 11:38:57 AM »
Every employer I ever had always automagically capped my contributions once I hit the limit.  Generally speaking, you don't have to worry about overcontributing.  They will cut things off for you, even if that means a partial contribution in the last paycheck where you hit the limit.  For example, if you normally contribute $1200 per paycheck, if it takes $750 to hit the annual limit, they'll only take the $750.

If they're a super-nice employer, they'll take $0 from the rest of your paychecks and then start your contributions again automatically the next January 1st.

Throughout-the-year employer matching can be a pain to figure out, but it truly is a first world problem.  The way I usually did it was to take the 401(k) max divided by my annual salary and then round up to the nearest percentage point, then set my contributions to that percentage before January started.  Of course you have to keep an eye on it and adjust if you get bonuses or raises.  Usually, though, if you're on top of things you can get that last bit of match in December.  It's a fun game to play.

Need2Save

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Re: 401k max contribution and timing of paychecks
« Reply #8 on: November 05, 2016, 08:14:39 AM »
The date of when you were paid, and thus, the money was deducted from your earnings determines what tax year it applies to.  There are many situations when the money is not deposited until the next tax year, but it is irrelevant for W2/tax reporting.  Always go with your YTD payroll data, not your 401k recordkeepers YTD totals.   

If you are looking for a quick formula to help determine what % to contribute to spread out over the entire year, go with:
$18,000 / Your estimated taxable earnings X 100 = your target %

Example 1:
$18,000 / $75,000 x 100 = 24.  So if you make $75k and you want to max out $18k, you need to contribute 24% for the entire year.

Example 2:
$18,000 / $140,000 x 100 = 12.857.  So if you make $140k and you want to max out $18k, and you have to put in whole percentages, I would go with 13% and check that your payroll provider will cap your contributions at $18,000 when you hit the limit, or reduce from 13% to 12% towards the end of the year to get as close as possible.

If your employer allows you to put in whole dollar amounts instead of %, it makes it even easier.

Also, if you have any variable pay like a bonus or over-time, etc., that will complicate your calculations and you should confirm if those extra earnings are also included as 401k-eligible.

Rubyvroom

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Re: 401k max contribution and timing of paychecks
« Reply #9 on: November 05, 2016, 10:49:45 AM »
Thanks for all the input. I have been reading a little about front loading your contributions so I may try that for the first time this year keep a somewhat high % contribution through April (not so high that I don't keep the company match all year).

Our company pays a bonus in April that does apply to the 401k, and that is my only variable pay. My company also gives raises in April. I think that makes May a fine time to review my YTD contributions and do the math to spread the rest of my contributions evenly throughout the year, knowing that I should be somewhat ahead of things after having frontloaded a bit for the first 4 months.