This is a little bit of a twist on another question that has been asked in this community. My wife started a new job in February, after which she had contributed about $2,000 through her previous employer's 401k, which did not have a matching policy. The new employer has a generous 50% matching policy. Originally we were going to manually cap out her contributions through the new employer at $17,500, in order to avoid the excise tax, but maximize the $8,750 in matching contributions.
But, since 50% free money is much higher than 6% tax, I'm realizing that it might make sense to contribute a full $19,500 through the new employer to take advantage of an additional $1,000 in matching, even though it would mean the excise tax and being double taxed on the amount. If I assume 25% tax rate, that would be $500 excess tax, plus the 6% excise tax of $120, is $670, which is still less than $1,000 in free money. Am I missing something here?
Note that the new employer does not know or care how much she contributed to the previous employer (we asked in the context of having them systematically limit her contributions this year), And the previous employer will not allow her to remove the $2,000 contribution.