# 401k contributions...when do you max out? **URL:** \ **Category:** In My Humble Opinion\ **Created:** [January 8, 2006, 6:40pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035 "2006-01-08T18:40:01Z")\ **Posts on this page:** 13\ **Page:** 2
**Author:** ![missbunny](https://avatars.discourse-cdn.com/v4/letter/m/76d3ee/32.png) [@missbunny](https://boards.straightdope.com/u/missbunny)\ **Post date:** [January 9, 2006, 6:15pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/21 "2006-01-09T18:15:11Z")
> [@ratatoskK](#): > > What benefit is it to the company to impose a contribution limit that’s lower than the max allowed by the IRS? There used to be a law that the total of all pre-tax contributions could not exceed a certain amount. That meant 401K, health insurance, etc. So, many companies put a limit on the 401K so that when ALL the pre-tax dollars were added, it wouldn’t hit that limit. I think this was abolished a few years back. Another reason is because of annual testing, it’s possible that the Highly Compensated Employees will get refunds. This means they get a refund of whatever excess monies of their own that they deferred, PLUS whatever match was provided based on those excess earnings. In short, they didn’t get to defer over a certain amount, but they got the match on that amount anyway. (Taxable, but they still get it.) Also, some lucky people have a match of 100% of deferral or 50% of deferral. Most companies are not going to want to match 100% of someone who is deferring up to the 415 limit of $41,000, so they put a cap (based on percentage) on how much employees can defer in the first place. ---
**Author:** ![Debaser](https://avatars.discourse-cdn.com/v4/letter/d/3da27b/32.png) [@Debaser](https://boards.straightdope.com/u/Debaser)\ **Post date:** [January 9, 2006, 7:17pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/22 "2006-01-09T19:17:32Z")
> [@missbunny](#): > > Yes, there is - it’s called 415 Annual Additions, which means that no one can contribute more than 100% of salary or $41,000 (in 2005), whichever is lower. You mean **$14,000** , right? How could you contribute more than 100% of your salary? ---
**Author:** ![missbunny](https://avatars.discourse-cdn.com/v4/letter/m/76d3ee/32.png) [@missbunny](https://boards.straightdope.com/u/missbunny)\ **Post date:** [January 9, 2006, 7:54pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/23 "2006-01-09T19:54:30Z")
> [@Debaser](#): > > You mean **$14,000** , right? > > How could you contribute more than 100% of your salary? Sorry, I wasn’t clear: deferral + match added together can’t be more than 100% of comp (which was $205,000 in 2004) or $41,000 (in 2004). (If the company maintains another qualified plan, the Annual Additions in all plans must be totaled together.) For 2005, the limits are $14,000/$42,000/$210,0000. For 2006, the limits are $15,000/$44,000/$220,000. Persons over Age 50 can make catch-up contributions of another $5,000 (beyond the $15,000) in 2006. ---
**Author:** ![Debaser](https://avatars.discourse-cdn.com/v4/letter/d/3da27b/32.png) [@Debaser](https://boards.straightdope.com/u/Debaser)\ **Post date:** [January 9, 2006, 8:13pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/24 "2006-01-09T20:13:39Z")
> [@missbunny](#): > > Sorry, I wasn’t clear: deferral + match added together can’t be more than 100% of comp (which was $205,000 in 2004) or $41,000 (in 2004). (If the company maintains another qualified plan, the Annual Additions in all plans must be totaled together.) OK. I see what you are saying about how a match could exceed 100% of compensation, although that seems a bit silly, since you’re really just raising the level of compensation. However, what are these numbers you are referring to? The limit for 401k contributions in 2005 is $14,000. What are the $42,000 and $210,000 numbers you mention referring to? ---
**Author:** ![Debaser](https://avatars.discourse-cdn.com/v4/letter/d/3da27b/32.png) [@Debaser](https://boards.straightdope.com/u/Debaser)\ **Post date:** [January 9, 2006, 8:18pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/25 "2006-01-09T20:18:18Z")
Nevermind. Found it (Finally, fifth try with Google. This seems to be a rarely used law.) [Fidelity](http://wps.fidelity.com/401k/pfp/rp/conlimit.htm) > [@](#): > > Total contribution > > The IRS has also set limits on the total amount that may be contributed to your 401(k) account from all sources combined, including any employer matching or profit-sharing contributions, and any employee after-tax contributions. For 2005, the maximum is the lesser of 100% of compensation or $42,000. This doesn’t seem like too many people would use it, though. Employer match wouldn’t bring most people somehow up from $14,000 to $42,000. Profit sharing would hardly be that generous, and even if it was it usually isn’t dumped into a 401k. The only realistic scenario I can think of is an employee dumping in after tax contributions, but that doesn’t really make sense either. You’d do just as good to put it into the bank. ---
**Author:** ![missbunny](https://avatars.discourse-cdn.com/v4/letter/m/76d3ee/32.png) [@missbunny](https://boards.straightdope.com/u/missbunny)\ **Post date:** [January 9, 2006, 8:44pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/26 "2006-01-09T20:44:56Z")
I wouldn’t call it rarely used - at my old company, many people hit the 415 limit. This was because we had a 401K and a very generous profit-sharing plan. I would imagine lots of partnerships with a PS plan easily hit the limit, as do small companies where they are trying to maximize the benefit for the owners/officers. I don’t think after-tax contributions factor in to the 415 limit at all. ---
**Author:** ![Debaser](https://avatars.discourse-cdn.com/v4/letter/d/3da27b/32.png) [@Debaser](https://boards.straightdope.com/u/Debaser)\ **Post date:** [January 9, 2006, 9:12pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/27 "2006-01-09T21:12:40Z")
That seems very odd. The profit sharing will end when you hit the limit. So, if you contribute too much to your 401k, you’ve basically thrown money away, since you’re effectively just reducing the amount of profit sharing that you get. Having a huge amount of profit sharing coming into my 401k would be nice, but I think it would actually make more less likely to put my money into it. I’d much rather just have them write me a check! 😉 ---
**Author:** ![missbunny](https://avatars.discourse-cdn.com/v4/letter/m/76d3ee/32.png) [@missbunny](https://boards.straightdope.com/u/missbunny)\ **Post date:** [January 9, 2006, 9:40pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/28 "2006-01-09T21:40:11Z")
It doesn’t work that way usually, because companies that have a discretionary profit-sharing comonent to their 401K will impose a limit on the 401K contributions - e.g., 15% of comp. Profit-sharing can also be structured as after-tax monies, or as deferred compensation, or under some other non-qualified structure, so those monies don’t factor in to the 415 limit either. ---
**Author:** ![Ass\_For\_A\_Hat](https://avatars.discourse-cdn.com/v4/letter/a/ec9cab/32.png) [@Ass\_For\_A\_Hat](https://boards.straightdope.com/u/Ass_For_A_Hat)\ **Post date:** [January 10, 2006, 6:59pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/29 "2006-01-10T18:59:32Z")
> [@Debaser](#): > > That seems very odd. The profit sharing will end when you hit the limit. So, if you contribute too much to your 401k, you’ve basically thrown money away, since you’re effectively just reducing the amount of profit sharing that you get. Not necessarily. While a technical reading of IRC 415 may lead you to curtail a profit sharing allocation to an employee who had reached that limit, in practice, the full allocation is usually given. The excess amount (including any associated earnings) is then refunded to the individual from the salary deferral contribtuions they had made for the year. ---
**Author:** ![Lok](https://avatars.discourse-cdn.com/v4/letter/l/e8c25b/32.png) [@Lok](https://boards.straightdope.com/u/Lok)\ **Post date:** [January 10, 2006, 7:12pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/30 "2006-01-10T19:12:48Z")
That is what my workplace used to do. Our contributions were limited to 15%, they would match 3% (It has since went up), and we could get profit sharing of up to 12%, all of our annual gross. This equaled 30% on a good year, and anything over 25% of our gross we recieved as a check about the end of February. Minus taxes of course. They also had a bonus program if our profits reached a certain point, with a minimum payout of 5%. So in a really good year, we could recieve checks for 10% of our gross. Only happened a couple of times before they changed the program, but it was really nice when it happened. Lok ---
**Author:** ![ivylass](https://avatars.discourse-cdn.com/v4/letter/i/9de053/32.png) [@ivylass](https://boards.straightdope.com/u/ivylass)\ **Post date:** [January 10, 2006, 10:48pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/31 "2006-01-10T22:48:21Z")
My 401k is 100% stocks right now (I’m 38) so my tolerance for risk is still rather high. I have 1% in company stock, merely as a token. The company also offers the option to purchase more company stock at a discount, but that’s after tax so I won’t do that (if I do) until my 401k is maxed out. ---
**Author:** ![HMS\_Irruncible](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hms_irruncible/32/7394_2.png) [@HMS\_Irruncible](https://boards.straightdope.com/u/HMS_Irruncible)\ **Post date:** [January 10, 2006, 11:09pm UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/32 "2006-01-10T23:09:02Z")
> [@ivylass](#): > > I know the limit you can contribute is 15%. Thanks to the length of time I’ve been at my job, my work performance and a recent wonderful raise, I’m contributing 13%. I believe the company match ends at 6%. > > Now, I’ve heard two schools of thought. The first is, contribute to your employer match and stop. Then, invest the rest yourself in a Roth IRA or somesuch. The second school of thought is to contribute as much as you feel comfortable with, since it’s pre-tax and lowers your tax liablity. > > I know the 401k is pre-tax and the IRA is post-tax. I have a Roth IRA that I’m also contributing to. > > Dopers, what do you do? Are you maxing out your 401k past your employer match, or do you go up to the match, then fund your other investments yourself? If there are any CFP-Dopers I’d appreciate your input. The rule of thumb I’ve always heard is if you expect to be in a lower tax bracket when you retire, put more in your 401k. If you think you’ll be in a higher tax bracket, put more in the Roth. If your company offers a decent match, do what it takes to get the match (it’s free money after all). Indirectly you could assume that the later a start you get on your retirement, the more it makes sense to go for the 401k. ---
**Author:** ![Plan\_B](https://avatars.discourse-cdn.com/v4/letter/p/3ec8ea/32.png) [@Plan\_B](https://boards.straightdope.com/u/Plan_B)\ **Post date:** [January 11, 2006, 3:41am UTC](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035/33 "2006-01-11T03:41:23Z")
Ms. Plan B and I always put in the maximum amount each year. Then one day we lookedd at how much we had and were amazed. Compounding definitely does work over the long term. [Previous page](https://boards.straightdope.com/t/401k-contributions-when-do-you-max-out/339035.md?page=1)