Author Topic: Had to reduce our 401K withholding!  (Read 9140 times)

engineerjourney

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Had to reduce our 401K withholding!
« on: July 01, 2014, 05:35:29 AM »
Husband and I received our yearly raises and for the first time I had to decrease our 401K withholdings to make sure we didn't go over the $17,500 limit!  In years past I would increase my percentage based on my raise (to keep the take home around the same) but since coming here we are set up to each max it out instead!  Automatic savings are really great, no thought needed!  Never thought I would be concerned about 401K limits!

boyerbt

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Re: Had to reduce our 401K withholding!
« Reply #1 on: July 01, 2014, 07:29:23 AM »
Congrats - that's awesome. That is a great concern to have!

Gin1984

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Re: Had to reduce our 401K withholding!
« Reply #2 on: July 01, 2014, 07:30:46 AM »
So where are you going to invest next?  Taxable, Roth?

sherr

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Re: Had to reduce our 401K withholding!
« Reply #3 on: July 01, 2014, 07:31:46 AM »
Congratulations and good job saving!

As an aside it's probably impossible for you to accidentally contribute more than the limit, the 401k company should just stop taking contributions when you've hit your yearly limit. Worst case scenario is that you are forced to withdraw the over-contribution at the end of the year. However it's probably still a good idea to get as close as possible to exactly hitting the limit at the end of the year because for a lot of companies the "3% match" (or whatever) ends up actually translating into "3% match per pay period that you contribute", so if you hit the limit a month early and didn't contribute anything the entire month of December then you'd be passing up 1/12 of your potential employer match.

engineerjourney

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Re: Had to reduce our 401K withholding!
« Reply #4 on: July 01, 2014, 08:36:44 AM »
Thanks all!

So where are you going to invest next?  Taxable, Roth?

Already maxing Roths for us and a family HSA too!  Emergency fund is also set up and probably higher than it needs to be.  Its been tight (take home seems so small sometimes compared to the salary number) and the minimal raise will give us a little wiggle room.  Almost all our savings is automatic so we pretty much spend what we bring home.  I have some in taxable but am not a huge fan, I much prefer the tax advantage account (who doesn't?).  My company allows you to do in-service withdrawals (rollover) of after-tax 401K to Roth IRA with no penalty after being with the company for over 5 yrs.  I have two more years until then to strategize for that.  Will be deciding soon whether to put extra monthly money in taxable or after-tax 401K in preparation of 5 yrs of service.  The only con to doing the after-tax contributions now is that it will have two years to create earnings which will be taxed at my high rate when I do the Roth conversion.  (After 5 yrs I would be rolling over the contributions monthly to avoid gains in the account).  Also on the table might be 529s but since we don't have any kids (or children we are close to), that isn't a pressing issue yet.  Its definitely an awesome problem to have!

Congratulations and good job saving!

As an aside it's probably impossible for you to accidentally contribute more than the limit, the 401k company should just stop taking contributions when you've hit your yearly limit. Worst case scenario is that you are forced to withdraw the over-contribution at the end of the year. However it's probably still a good idea to get as close as possible to exactly hitting the limit at the end of the year because for a lot of companies the "3% match" (or whatever) ends up actually translating into "3% match per pay period that you contribute", so if you hit the limit a month early and didn't contribute anything the entire month of December then you'd be passing up 1/12 of your potential employer match.

Thanks for the info! 

FrugalZony

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Re: Had to reduce our 401K withholding!
« Reply #5 on: July 01, 2014, 10:18:29 AM »
Congratulations and good job saving!

As an aside it's probably impossible for you to accidentally contribute more than the limit, the 401k company should just stop taking contributions when you've hit your yearly limit. Worst case scenario is that you are forced to withdraw the over-contribution at the end of the year. However it's probably still a good idea to get as close as possible to exactly hitting the limit at the end of the year because for a lot of companies the "3% match" (or whatever) ends up actually translating into "3% match per pay period that you contribute", so if you hit the limit a month early and didn't contribute anything the entire month of December then you'd be passing up 1/12 of your potential employer match.

I actually had that problem last year. I suppose different companies deal with this differently.
I was relieved to see that my company cuts the pretax contributions once the amount is reached and forces the minimum posttax contribution to get the employer match, so you don't loose out on the match.

Cheddar Stacker

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Re: Had to reduce our 401K withholding!
« Reply #6 on: July 01, 2014, 10:20:20 AM »
Awesome.

Keep in mind what sherr posted about matching rules, but you can also consider "frontloading". See the madfientist for discussion. The basic idea is that it's always better to get as much in as fast as possible. The reasons are:

1) More time for compounding.
2) Getting fired or FIRE'd.

When you reach the $17,500, you simply change your withholdings then, or your employer automatically does it for you. Some bloggers have described this strategy as a great thing to do in your final year of regular employment since it might be your last chance to defer that much income.

Either way, very cool, congrats!

Jack

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Re: Had to reduce our 401K withholding!
« Reply #7 on: July 01, 2014, 10:36:40 AM »
Awesome.

Keep in mind what sherr posted about matching rules, but you can also consider "frontloading". See the madfientist for discussion. The basic idea is that it's always better to get as much in as fast as possible. The reasons are:

1) More time for compounding.
2) Getting fired or FIRE'd.

When you reach the $17,500, you simply change your withholdings then, or your employer automatically does it for you. Some bloggers have described this strategy as a great thing to do in your final year of regular employment since it might be your last chance to defer that much income.

I would suggest frontloading not to the full $17,500, but rather to $17,500 - ([match %] * [# of pay periods remaining in the year]), unless it's your last year of employment and you're planning on quitting mid-year.

Cheddar Stacker

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Re: Had to reduce our 401K withholding!
« Reply #8 on: July 01, 2014, 11:05:21 AM »
Awesome.

Keep in mind what sherr posted about matching rules, but you can also consider "frontloading". See the madfientist for discussion. The basic idea is that it's always better to get as much in as fast as possible. The reasons are:

1) More time for compounding.
2) Getting fired or FIRE'd.

When you reach the $17,500, you simply change your withholdings then, or your employer automatically does it for you. Some bloggers have described this strategy as a great thing to do in your final year of regular employment since it might be your last chance to defer that much income.

I would suggest frontloading not to the full $17,500, but rather to $17,500 - ([match %] * [# of pay periods remaining in the year]), unless it's your last year of employment and you're planning on quitting mid-year.

Jack, great formula, but I have a question: Is this suggestion for anyone with an employer match that is tied to each individual contribution rather than to the total contribution for the year?

I have a 3% safe harbor no matter what I do, so it doesn't apply to me, just curious what you think about this for others. So if someone's employer matches the first 5% of contributions regardless of when they are made, does this still apply?

Jack

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Re: Had to reduce our 401K withholding!
« Reply #9 on: July 01, 2014, 11:36:04 AM »
Is this suggestion for anyone with an employer match that is tied to each individual contribution rather than to the total contribution for the year?

Yes.

So if someone's employer matches the first 5% of contributions regardless of when they are made, does this still apply?

No, in that case you should max out the entire $17,500 ASAP.

Sorry, I'm used to per-pay-period matching (which I assume is more common?).

(Aside: In my case, per-pay-period matching is especially annoying since my company also has a fixed dollar amount cap and they implemented the 401k plan mid-year, so it's mathematically impossible for me to get even close to the maximum match in the number of pay periods remaining. You should consider yourself lucky!)
« Last Edit: July 01, 2014, 11:39:11 AM by Jack »

engineerjourney

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Re: Had to reduce our 401K withholding!
« Reply #10 on: July 01, 2014, 11:40:50 AM »

Sorry, I'm used to per-pay-period matching (which I assume is more common?).

That's what I have.  I never would have thought of using your formula though to account for it.. I will have to think about it since our (almost insignificant) bonuses are also matched if you contribute from them.  And we do get some overtime pay which is also contributed the same percent as a regular paycheck (which is mainly why I have to periodically check our contribution percentage to make sure we are not going to go over/under).   

Hedge_87

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Re: Had to reduce our 401K withholding!
« Reply #11 on: July 06, 2014, 06:51:53 AM »
Our accounting department would really hate it if more Mustache's started showing up at work. It's like pulling teeth to get anything done with our accounting department. Any time I call in to change withholdings or something I get a big long sigh. O and to make it even better they only like you to make 401k contributions in $25 increments lol Why that makes any difference IDK.

To the OP congrats that sounds like a good problem to have lol

engineerjourney

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Re: Had to reduce our 401K withholding!
« Reply #12 on: July 06, 2014, 03:46:04 PM »
Our accounting department would really hate it if more Mustache's started showing up at work. It's like pulling teeth to get anything done with our accounting department. Any time I call in to change withholdings or something I get a big long sigh. O and to make it even better they only like you to make 401k contributions in $25 increments lol Why that makes any difference IDK.

Oh wow, that sounds like a pain!! My company uses fidelity for the 401K so its pretty easy to change whenever online.  Though we have to do it in full percentages so it can be hard to get exactly the limit, which is why I have to keep an eye on it.  I am surprised you have to do it through a person!

To the OP congrats that sounds like a good problem to have lol

Thanks!

Workinghard

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Re: Had to reduce our 401K withholding!
« Reply #13 on: July 06, 2014, 04:29:10 PM »
I also have to go through a person. It is so annoying!

Frugal Father

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Re: Had to reduce our 401K withholding!
« Reply #14 on: July 07, 2014, 11:08:41 AM »
Our accounting department would really hate it if more Mustache's started showing up at work. It's like pulling teeth to get anything done with our accounting department. Any time I call in to change withholdings or something I get a big long sigh. O and to make it even better they only like you to make 401k contributions in $25 increments lol Why that makes any difference IDK.

Oh wow, that sounds like a pain!! My company uses fidelity for the 401K so its pretty easy to change whenever online.  Though we have to do it in full percentages so it can be hard to get exactly the limit, which is why I have to keep an eye on it.  I am surprised you have to do it through a person!
I have Vanguard and it's the same way. In less than 60 seconds, I could go online and have the percentage changed, but I think I have the same issue as well, that I can only use nice, round numbers.

Congrats on the achievement. I'm still a few years out from reaching that milestone (just finished my first year of work), but I bet it feels great to already be there!

MandyM

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Re: Had to reduce our 401K withholding!
« Reply #15 on: July 07, 2014, 01:23:47 PM »
Awesome.

Keep in mind what sherr posted about matching rules, but you can also consider "frontloading". See the madfientist for discussion. The basic idea is that it's always better to get as much in as fast as possible. The reasons are:

1) More time for compounding.
2) Getting fired or FIRE'd.
...

I front loaded for the first time this year. It works out well for me as my company doesn't match, but contributes a % of my salary every fall (historically ~8%). Another small advantage is that you are putting off a portion of your tax witholdings.

Mississippi Mudstache

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Re: Had to reduce our 401K withholding!
« Reply #16 on: July 07, 2014, 03:27:49 PM »
Husband and I received our yearly raises and for the first time I had to decrease our 401K withholdings to make sure we didn't go over the $17,500 limit!

Congrats! Last year I just barely missed out on maxing out my 401(k) by about $500. After this year's bonus and raise, I realized I was going to have to reduce my withholdings at some point as well to keep from going over the limit. I will probably let it ride until this fall to try and front-load as much as possible. It's a nice problem to have!

kite

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Re: Had to reduce our 401K withholding!
« Reply #17 on: July 09, 2014, 05:04:41 PM »
Always front loaded.   Our annual bonus is paid in February,  and you can set a separate deferral for that, which helps.   I also have experience with a layoff later in the year.   On the bright side,  my contribution for that year was complete.   

medinaj2160

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Re: Had to reduce our 401K withholding!
« Reply #18 on: July 09, 2014, 08:21:15 PM »
I am curious..... what happens when someone goes over the 17,500 limit?

This is the first year me and wife are maxing out our 401K's and thanks to this thread we just double checked our contributions and realized that we are over contributing by 2K each. I used paycheck.com to set my contribution % in the beginning of the year but is off...

Will

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Re: Had to reduce our 401K withholding!
« Reply #19 on: July 09, 2014, 08:31:34 PM »
I am curious..... what happens when someone goes over the 17,500 limit?

This is the first year me and wife are maxing out our 401K's and thanks to this thread we just double checked our contributions and realized that we are over contributing by 2K each. I used paycheck.com to set my contribution % in the beginning of the year but is off...

According to irs.gov:

Quote
If an employee's total deferrals are more than the limit for that year, the employee should notify the plan and ask that the difference (called an excess deferral) be paid out of any of the plans that permit these distributions. The plan must then pay the employee that amount by April 15 of the following year (or an earlier date specified in the plan).

Excess withdrawn by April 15. If the employee withdraws the excess deferral by April 15, the withdrawn amount is not reported again as part of the employee’s gross income for the year. Any income earned on the withdrawal is reported as gross income for the tax year in which it is withdrawn. The distribution is not subject to the additional 10% tax on early distributions.

Excess not withdrawn by April 15. If the employee does not take out the excess deferral by April 15, the excess, though taxable in the year of deferral, is not included in the employee's cost basis in figuring the taxable amount of any eventual benefits or distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.

Cheddar Stacker

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Re: Had to reduce our 401K withholding!
« Reply #20 on: July 09, 2014, 10:02:15 PM »
What Will said, but also since your federal taxable income was reduced by more than 17,500 the excess deferral is taxable income to get your income back up to the proper level. No penalties, just taxes.

Davids

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Re: Had to reduce our 401K withholding!
« Reply #21 on: July 10, 2014, 05:18:02 PM »
The one thing I wish you could do with 401K is instead of percentage of salary indicate a fixed amount you want withheld so I would not have to adjust after a payraise or bonus (if 401K deduction occurs with bonus). Then all you have to do is 17500/26, 24, 12 or how often you get paid to make it easier.

Hedge_87

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Re: Had to reduce our 401K withholding!
« Reply #22 on: July 10, 2014, 06:01:48 PM »
The one thing I wish you could do with 401K is instead of percentage of salary indicate a fixed amount you want withheld so I would not have to adjust after a payraise or bonus (if 401K deduction occurs with bonus). Then all you have to do is 17500/26, 24, 12 or how often you get paid to make it easier.
We get fixed amounts in $25 increments.  17500/12 =1,458.333333 this is not compatible with our accounting department.

curiousnomad

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Re: Had to reduce our 401K withholding!
« Reply #23 on: July 16, 2014, 07:55:18 PM »
The one thing I wish you could do with 401K is instead of percentage of salary indicate a fixed amount you want withheld so I would not have to adjust after a payraise or bonus (if 401K deduction occurs with bonus). Then all you have to do is 17500/26, 24, 12 or how often you get paid to make it easier.

My 401K with Principal allows this. I can also change it on their website, but there is a lag back to company payroll. (I get paid weekly.) No changes at all can be done from the company side!

Calvawt

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Re: Had to reduce our 401K withholding!
« Reply #24 on: July 16, 2014, 08:56:53 PM »
Some companies also give the option to put large portions of your final paycheck into the 401k/403b. For example, my company allows you to put your vacation bank cash out into the program since its your final paycheck.