401(k) Max Contribution Basics: Do You Know How it Works?

[@davidfolts5893]

Thanks, Justin. Your future self will never have regrets over your present self maxing out 401k contributions.😀

[@ApproachFinancial]

☑️ 100% agree, David!

[@Da_Crow]

im going to mega backdoor the hell out of account - you got great videos

[@radhikasuresh9273]

Your channel is THE most comprehensive for 401(k) savings strategies! Question: My employer provides a 3% non-elective 401(k) contribution to all employees in order to pass the discrimination tests. That allows me to contribute the full pre-tax limit to my 401(k). However, it appears that my after-tax 401(k) contribution may be capped. My most recent pay stub has dwindled my after-tax contribution to zero. Does that sound reasonable? In other words, if the employer is making a non-elective contribution to allow pre-tax buckets to be fully utilized by HCEs, are they then allowed to cap the after-tax bucket?

[@ApproachFinancial]

Yes, it's not unheard of for employers to limit after-tax contributions. Many employers won't allow those after-tax contributions at all because they can mess up the testing. The safe harbor allows you to max out the pre-tax (and/or Roth, if available) deferrals, but adding after-tax contributions opens a different can of worms. You can always ask the employer why there's a cap and ask if it's possible to raise or remove it. It's possible that nobody has looked at the plan design recently, and maybe they'll make a change. But if your workplace has people with a broad range of incomes, it may not work.

[@blackbeardpapa9547]

fantastic, as always. I am a freelancer and I have my own 401k . I ve been putting the max amount almost each year, but I never got around to do a profit sharing for myself, because I thought the taxes would go through the roof . Also, I did not know whether I have to modify something in that 401k plan with the investment firm, to allow myself for profit sharing. Any thoughts?

[@ApproachFinancial]

Thank you, and there's a decent chance that your individual 401(k) can already accept employer contributions without any amendments or document changes. The big providers like Vanguard, Fidelity, Schwab, etc. often allow what I'm calling "profit sharing" contributions (but they might call them "employer" contributions). It's usually only when you're trying to do "voluntary after-tax" contributions (which those providers generally do not accommodate) that you run into limitations and need to get a different plan document. Obviously, you'd want to triple-check with your CPA and your vendors, as I may be misunderstanding the situation and this can get complicated.

[@jonathan56750-w]

If you do not get employer's contribution (some employers only give max 3%) I think it is better to put the contributions on ROTH IRA or Brokerage Account.... There are a lot of fee you have to pay if you put your contribution into 401K : participant fee , sales charge (front end load / back end load) , expense ratio, and the tax for distribution. In my opinion, you just pay the federal & state income taxes at beginning then put the cash into brokerage account or ROTH IRA... get SP 500/VOO, QQQ stocks then you will get better result at the long run.... it hard to beat the SPY/VOO, QQQ. With low expense ratio, your contribution will double & triple faster than you put it in 401K...

[@ApproachFinancial]

The quality of a 401(k) is certainly an important factor to consider. If a 401(k) plan has sales charges and other high fees, that might be something to bring up with the employer. They can probably do better these days, which would often help the employer as much as the employees (or more, since the owners typically have the biggest account balances). It sounds like that plan hasn't been thoroughly reviewed in a while, and you might be able to motivate them to improve things. If there's any match at all (3%, for example), I'd probably think about at least contributing up to that limit. Then maybe evaluate all of the options available for any additional funds.

[@rizk1386]

Excellent! I have a question, if someone has 401 a by employer and also have 403b and 457b for voluntary savings plan and another account as well, and they are able to maximize with 22000 all of them, and employer can contribute more than 22000 to 491a. What would be the maximum per year for that client. Would it still be 66000 per year and they can not add more than that to all the accounts including employer and their voluntary contributions.

[@jsac3939]

Thank you for the informative video. My employer has a matching 401k policy of $0.50 on $1.00 up to 4% of compensation. All employees are automatically enrolled at 4%, however, I wanted to increase my contributions to get closer to the annual limit of $22,500. The problem is, that when I try to increase my contribution, I get a notice stating "Your PRE-TAX contribution amount must be between 0% and 4%." I am nowhere near the max 401k contribution limit set by the IRS, so I am not understanding why I am not being allowed to increase my contributions. Do you know why this could be? You mention Nondiscrimination tests, could that be the reason?

[@ApproachFinancial]

I'm not sure I've seen such a low limit before. It could possibly have something to do with trying to pass nondiscrimination tests, but that's pretty limiting. I'd ask the benefits person or the Plan Administrator if that level is correct, if there's any reason to keep it, and they'd consider changing it.

[@PYehl1]

What happens when you have like 30% taken out of your pay and at some point toward end of year you reach your max allowed limit. Does your company just stop pulling out of your pay until the start of the new year?

[@ApproachFinancial]

If the employer and plan administrator are doing things correctly, then yes, your contributions typically stop automatically. But it's ideal to monitor yourself, as well, to avoid any issues. Note that maxing out early in the year can potentially cause you to miss out on matching funds if your plan only calculates matching contributions per paycheck (as opposed to doing an annual true-up). Ask your plan administrator about that.

[@plurouno5394]

Thank you for sharing these informations. Now, as the only employee and the employer of my S corp in my 50's with a W2 of about $60,000 and $30,000 from Schedule K-1, can I say that my yearly net is $90,000, thus able to contribute the maximum of $73,500 for 2023?

[@ApproachFinancial]

My view would be that you can only use the W2 income of $60k in your calculations, unfortunately. In general, compensation must be subject to payroll taxes (Social Security and Medicare, for example, or self-employment tax for Schedule C filers) for salary deferral or employer contributions. The $30k is not subject to those taxes, as you may already know-that's why many people choose to use an S-corp. While you get a break on payroll taxes by keeping compensation low, you can potentially limit your ability to contribute to a retirement plan. Plus, Social Security benefits down the road may be lower when you pay less in to the system. There are always pros and cons... Of course, I don't have the complete picture of your situation, and I could be wrong. And different people might read these comments at different times, so it's critical for anybody reading to triple-check with their tax professional before making any decisions or taking action. These comments may be incomplete, inaccurate, out of date, or not applicable to your situation.

[@CaKiteboarding]

Hello, Can I add to my 401K for last year 2023 before April 15, 2024? Let’s say I have 15k in and I am over 50. Can I still add to it or catch up or does it all have to be before December 31st 2023? Thanks

[@ApproachFinancial]

The April deadline is generally for IRAs, but not for workplace plans like 401(k) plans. Assuming you're not self-employed(?), it seems unlikely that you can still add funds to your 401(k) for last year. Those contributions generally go through payroll, and you must choose to contribute for a given year (or pay period) ahead of time. That said, there are always exceptions and circumstances that I'm not aware of, so it may be possible. I would contact your Plan Administrator or benefits department and ask what your options are. For now, you might only be able to work on 2024 (and, more importantly, go kiting if/when the wind is good). For instance, if you have extra cash available, you could increase your contributions now and spend down cash, assuming you're still working. Then, as you deplete that cash, you might decrease your contributions for the remainder of the year. Be sure to verify with your employer and Plan Administrator *exactly* (and before you decide on anything) when/how you can make changes to your contribution amount. You'll still have the maximum for 2024, so that might not solve the problem entirely if you have a significant amount to invest. If you are self-employed and use an individual 401(k), things may be different.