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Since there is a max for our contribution of $19,500, so (1) if a company matches 50%, that means the total max out at $29,250?

On the other hand, (2) if a company matches 100% but only for 4.5%, that means theoretically, it can go up to $39,000 total contribution?

But for (2), even if the salary is at $200,000, then 4.5% is only $9,000 so that means total contribution is $18,000. We can contribute $19,500 and with the $9000 matching, it is $28,500. In both (1) and (2), we contribute about $19500 and the company is matching about $10,000 -- except one situation: if the salary is really high, like $430,000, then 4.5% of it is $19350, and together with 100% matching, it is about $39,000? Is that above true? It seems like it is making the rich richer.

  • "It seems like it is making the rich richer" This is a benefit to a high-paid individual, are you proposing that companies don't encourage retirement and for somebody "less rich" to take that persons position? It isn't making them richer, it's about a source of income when they retire when they may not have other income. – Ron Beyer May 10 at 18:48
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    I thought if the person not making as much money but want to invest more in the retirement account, should be allowed to – nonopolarity May 10 at 18:49
  • The 401k limits are specifically designed to prevent high-wage earners from outpacing lower-income earners (which is why the limits are a dollar amount, not percent of income). If you want to put something away without limits (depending on income), use an IRA. – Ron Beyer May 10 at 18:53
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    The IRA has limits. And the limits are lower and more confusing. – mhoran_psprep May 10 at 22:00
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There are basically 3 rules for 401k contribution limits (using 2020 numbers):

  1. The max an employee can defer from their paycheck is $19,500. If the employee is over 50 years old they can defer $6,500 more than that, or $26,000 total.
  2. The total of employee amount plus employer paid amount (either from matching or just straight paid without a matching requirement), cannot exceed $57,000 (or $63,500 for over 50).
  3. The employer paid amounts must be the same percentage available to all employees. The maximum amount of the employee's income that can be used to calculate the employer paid amount is $285,000.

Point 3 is what helps make it fair(er) for all employees. At least in the sense that the employer portion doesn't differ as much. Some plans may allow employees to contribute drastically differing amounts of the their own money, however.

More info here.

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    it sounds like $57000 can be reached then by the "after tax", or "after tax" and convert to 401k Roth the same day or next day? (the mega backdoor). – nonopolarity May 10 at 19:59
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    @nonopolarity From the plans I've been in, don't believe you can convert while still part of the plan, you would have to have separated from the company before then (or company been sold). Additionally there are tests for highly compensated employees, irs.gov/retirement-plans/… and those HCEs have gotten a taxable check in the next year as their max contribution has been lowered to stay in compliance for the company.. – Morrison Chang May 10 at 20:05
  • @nonopolarity good point about after tax contributions. I don't have metrics on how many companies offer that so I removed that statement. If a company offers both after tax contributions and in plan conversions to Roth in theory that should work. (Again I don't know how common that is.) – TTT May 10 at 20:20
  • @Morrison I don't know how common it is, but there are at least some companies that offer both "after-tax" contributions and in-plan conversations. The company where I work is one of them. – Daniel May 10 at 21:05
  • @Daniel Thanks forgot about Roth 401k - irs.gov/retirement-plans/… which allows for pre-tax to post-tax rollovers To my knowledge it is still limited to the max employee contribution ($19.5K+6) and still restricted by the HCE tests (as technically under the 401k plan rules). – Morrison Chang May 10 at 21:30

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