Author Topic: Company match and the 18k limit  (Read 2626 times)

Sulame66

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Company match and the 18k limit
« on: February 10, 2017, 07:27:27 AM »
I don't think I've seen this answered before but I'm sure it has been ...

For the 18k maximum contribution limit to my 401(k) - does this include or exclude the company match? My company just dumped $2,500 in (they do it the 2nd week of February every year) which is their match for the 2016 calendar year. Does that mean for the rest of 2017 I can invest $15,500 or $18,000 of my own money into the account? I can see pros and cons to each

SeattleCPA

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Re: Company match and the 18k limit
« Reply #1 on: February 10, 2017, 07:48:11 AM »
I don't think I've seen this answered before but I'm sure it has been ...

For the 18k maximum contribution limit to my 401(k) - does this include or exclude the company match? My company just dumped $2,500 in (they do it the 2nd week of February every year) which is their match for the 2016 calendar year. Does that mean for the rest of 2017 I can invest $15,500 or $18,000 of my own money into the account? I can see pros and cons to each

No, it doesn't. And just so we're all on the same page (and using even numbers so the math is super understandable), assume you're under age of 50 and that your employer provides a safe harbor match of 4%. Further, let's set your salary to $100,000.

You can contribute $18K of the $100K to your 401(k).

Your employer will contribute an additional $4K to your 401(k).


Sulame66

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Re: Company match and the 18k limit
« Reply #2 on: February 10, 2017, 08:05:15 AM »
So that complicates things in calculating the growth progression.

Time to bust out the actuarial skills ...

So what I really have, is an annuity with payments of my % contribution every two weeks, which we assume grows at 7%. We have 26 such payments, then we get a side payment of $2,500 dumped in. Then we have to assume the $2,500 grows 3% (average raise) each year, and the % contribution I make myself keeps pace with the contribution limit increase. I then have to repeat this X times where X is years until retirement.

Time to play around with excel.

Aggie1999

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Re: Company match and the 18k limit
« Reply #3 on: February 10, 2017, 09:30:02 AM »
Another thing you should look at is if your 401k plan allows after-tax contributions. Then you can put up to ~$53k per year (I forget the exact number for this year). I believe the $53k per year includes the company match. Someone correct me if I am wrong.

Sulame66

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Re: Company match and the 18k limit
« Reply #4 on: February 10, 2017, 09:55:28 AM »
I'm eligible for a pre-tax contribution rate, an after-tax contribution rate, and a Roth Contribution rate.

Are you saying I can basically have a brokerage account through my 401(k) with lower fees than Vanguard?

Aggie1999

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Re: Company match and the 18k limit
« Reply #5 on: February 10, 2017, 12:33:07 PM »
I'm eligible for a pre-tax contribution rate, an after-tax contribution rate, and a Roth Contribution rate.

Are you saying I can basically have a brokerage account through my 401(k) with lower fees than Vanguard?

It's not a seperate brokerage account. It's just another classification of the money on your 401k. Perhaps under the hood the 401k is in different accounts but that is transparent to you. The after-tax contributions come out of your after tax part of your pay check just like Roth contributions. Unlike Roth though the growth from the after tax funds are taxed at withdraw time (i.e. just like the pre-tax growth). It gets even more interesting if your 401k allows in-service roll overs while you are still employed. You basically roll the after-tax dollars immediately out of the 401k into a Roth IRA. Thus, any growth on that money becomes tax free. Read the following:

http://www.madfientist.com/after-tax-contributions/

From what I gather only some 401k's allow after tax contributions and even fewer allow in-service withdraws. Even if your employer only allows the after tax contributions it still seems worth it to me over a traditional taxable brokerage account. You retire early, have the Roth portion and the after tax portion of the 401k sent to a Roth IRA while the pre-tax portion and the growth on the after-tax goes to a tIRA. Then you start your Roth conversion ladder.

swashbucklinstache

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Re: Company match and the 18k limit
« Reply #6 on: February 10, 2017, 05:59:12 PM »
Small note that the "total" 401K limits of $53,000 or whatever it is can include other things in addition to your contributions and company match, like ESOP if your company has one (you'd know if you did, almost certainly).

Hargrove

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Re: Company match and the 18k limit
« Reply #7 on: February 10, 2017, 08:17:50 PM »
Odd additional fact...

Even Roth 401k employer match is taxed. There is no way around this.

Metric Mouse

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Re: Company match and the 18k limit
« Reply #8 on: February 11, 2017, 01:56:32 AM »
Odd additional fact...

Even Roth 401k employer match is taxed. There is no way around this.
Why is that odd?

Hargrove

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Re: Company match and the 18k limit
« Reply #9 on: February 11, 2017, 06:31:16 AM »
Because of reasons!

No, it makes sense, it's just a little extra math that surprize some who are thinking their Roth is tax-free, but the employer match balance won't be.

I actually like to diversify my taxes anyway... some Roth down the line will reduce my 401k bill.

Indexer

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Re: Company match and the 18k limit
« Reply #10 on: February 11, 2017, 09:44:32 AM »
The reason the employer match is always pre-tax is because the employer is the one getting the tax deduction for that part, not you. If you go with Roth you pay more taxes, but that doesn't mean your employer wants to pay more taxes.

As it has been noted, the true max is $53,000. This includes up to 18k pre-tax/roth from you, the employer match, any profit sharing, and after-tax contributions.

I'm eligible for a pre-tax contribution rate, an after-tax contribution rate, and a Roth Contribution rate.

What I'm about to tell you about is very rare, but it is worth asking about. Some companies, I know Google is on the list, will allow you to contribute to the "after-tax" portion, and then later convert that to the Roth portion all within the 401(k)!!! Even if you can't do that you can contribute to after-tax now, and then when you roll it into an IRA you can roll the after-tax portion into a Roth IRA. That means you can contribute the full 53k(including the employer match) and then later roll all of it into IRAs(trad+roth).

If that sounds too good to be true, it is. Whether you could roll after-tax money into a Roth was a long standing question. Investment firms, 401(k) providers, and most CPAs assumed no, but the IRS didn't specifically say that. Then in 2014 the IRS said you could. I don't think they realize what they were doing at the time, but they effectively increased the tax advantaged limit on a 401(k) to $53,000!!! :D

Downside to this: if your company doesn't let you do it within the 401k then you have to wait till you leave to complete the rollover. The IRS could change it before you leave/retire.

MustacheAndaHalf

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Re: Company match and the 18k limit
« Reply #11 on: February 12, 2017, 08:34:20 PM »
The employer match does not go into a Roth account.  When you contribute to a Roth 401(k), your employer match goes into a Traditional 401(k).

Just to speculate on the theory for a moment, imagine two different tax brackets receiving a $1000 Roth contribution from their employer.  To get $1000 into the Roth account of someone in the 39% bracket requires a $1640 contribution.  In the 25% tax bracket $1330 pre-tax becomes $1000 after-tax.  In general the IRS rules prevent this kind of bias in retirement plans, but that's speculation as to how it wound up this way.