A friend of mine is changing jobs and the new company has a waiting period of 3 months before he can contribute to the 401(k) plan. He’s starting in a week. He said if he tells the new employer to contribute 100% of his gross pay (minus in deductions for things like paying for the company’s group medical plan) he should be able to contribute the max for 2015. But he wasn’t sure if he would be allowed to do this or not.
My experience has been, that the employer decides what percentage or the actual dollar amount goes into the 401(k), but it got me wondering for my friend. Are their plans out there that won’t allow you to contribute 100% of your pay until you reach the max? I can’t imagine why they would care, but I thought I would ask here to get the straight dope on this.
I actually did that once, but I’m sure it depends on a load of variables. I wanted the tax advantage, but the time frame was extremely tight. I just made it.
But the idea is a good one. You just have to be able to live for a defined time on your own resources. It shouldn’t matter to the company, nor to the fund.
My plan allows me to contribute up to 85% of my pay up to the $24,500 limit in pre-tax dollars, then it automatically rolls over to post tax dollars. I don’t know why the 85% limit, it seems so close to 100% as to make no difference.
I don’t know if there’s anything magical about 100% but when I was first eligible to contribute to a 401k, back in my 20s, I contributed 50% of my pay in order to max it out for the year (I started ~June of that year). No problems at all (that is, nothing weird from work/payroll, fund company, IRS).
Keep in mind that the maximum limit is for the year as a whole so if he contributed anything at the previous employer, he’ll want to deduct that from what he contributes to the new employer’s plan. (I made the mistake of over-contributing and had to get a refund from one of the plans and pay taxes on the excess amount.)
Each plan provider is free to have whatever extra restrictions they want, for reasons smart or stupid. But there is no Federal limitation against contributing 100% of your otherwise take home pay all at once. Many of my coworkers do just that.
As LSLGuy said, there is no law against it. But in my experience, most companies limit the % of your paycheck that can go into your 401k. Where I work we’re only allowed to contribute 25% (and another 25% if you’re eligible to make catch-up contributions based on age).
I wonder if that 85% limit is imposed by the employer or by the actual 401(k) plan the company assembled. I can’t think of a rationale why they wouldn’t allow you to do 100% for the pre-tax. Maybe they feel some employees might get themselves into financial trouble while going X number of paychecks with a zero amount.
I can’t imagine the company running the plan would care. You figure the more money they get from people and the quicker the better off they are as an investment business which is charging fees.
Before-tax 401(k) contributions are still subject to Social Security and Medicare taxes. So they probably want to leave behind enough to pay those and other miscellaneous state and local taxes and maybe some sort of employee-benefit deductions. Especially for a large corporation with employees in different states, it’s easier just to have a standard policy for all employees and having different policies for different employees might get them in trouble as far as equal-treatment requirements go.
The 80%/85% limit was in place to leave enough for payroll taxes and non tax deductions (insurance, union dues, etc)
My current employer had a limit of 40%. That’s a plan feature to minimize the number people who have forced returns of excess contributions because the plan is “top-heavy” meaning the highest paid employees get most of the benefit.
Not for the OP, but in general, consider your employer’s matching plan, too. If I contribute by March, I won’t get the matching contribution for April through December. My employer only matches the maximum on a monthly basis.
Okay, it might be relevant to the OP, too, because there are still six months left in the year available for matching.
That’s true, my employer’s match is 100% on the first 3% and 50% on the next 3%, so I need to always put in 6% to get the maximum match, regardless of whether I’ve reached the statutory maximum. That’s why I continue to contribute to a post tax IRA after I hit $24,500. Current laws allow me to move post tax money into a Roth IRA after retirement.
The limit is 18,000 for folks under age 55. And it’s 24,500 for folks over 55.
The extra 6,500 is the so-called “catch-up” contribution intended to let folks nearing retirement who are behind on their savings “catch up” to where they should have been had they been saving regularly since they were young. And had they invested successfully without getting hammered in 2008.
Also, there are millions of people who worked significant portions of their careers before the 401k legislation was passed in 1978. We’re not all millennials.
I’ve been stating the limit incorrectly above by the way, the catch-up limit is only $6,000 making the maximum $24,000. I confused the catch-up contribution with the IRA limit. Sorry.