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Suppose I max out my 401(k) really early. This avoids the risk that if I lose the job I would have lost the chance to contribute to it fully. However there is another risk. My company doesn't match. Suppose I do lose my job in the middle of the year and go to another company that matches. Then I would lose out on the ability to get the matches from the new company in the rest of the year, because I (technically) cannot contribute more 401(k).

But... Since the new employer doesn't know how much I may have contributed, I may (should this scenario of changing jobs really occur) simply pretend I didn't know anything and contribute to the new company's 401(k) plan anyway (taking advantage of the matches), as if I didn't have 401(k) contributions already. Then, after the end of the year, I can ask the old 401(k) plan for excess contributions back from that plan, as allowed by the IRS before April 15th.

To summarize, the strategy is, if I switch jobs, contribute fully to each job, and then at the end of the year, strategically withdraw excess contributions from the one that had the lowest match.

Would this strategy: (a) work? (b) make sense? (c) be legal? (d) be ethical?

  • 2
    One additional point for you to consider. Assuming that you were not contributing to a Roth 401k with post-tax dollars, when you ask for a return of excess contributions after the end of the year but before April 15 of next year, will your previous employer be issuing you a revised W2 for the previous year, or a W2/1099-MISC/1099-R for next year? That is, will your stratagem shift income from one year to the next, and is that something that you would like to see have happen? – Dilip Sarwate Mar 8 '12 at 12:43
  • I'm not familiar with the 401(K) (not a USian) but if you aren't getting a match, can't you make no monthly contributions and then a lump sum contribution at the end of the year, if you haven't changed jobs? This would still get you the tax break. If you have changed jobs you can start making contributions and get the match and the tax break. – DJClayworth Mar 8 '12 at 14:51
  • @DJClayworth A 401k plan involves a salary reduction agreement in which the employee agrees to accept a reduced salary in return for the employer contributing that money (and possibly a matching amount up to some x%) to the 401k plan where it accumulates and grows tax-deferred for the employee's benefit. Contributing a lump sum at the end of the year would require an agreement saying something like "Just for these last two pay periods, set my salary to $1 and contribute everything else to my 401k" Many plans prohibit such things e.g. only one change per year in contributions is permitted. – Dilip Sarwate Mar 8 '12 at 15:20
  • "returned to you from any of the plans that permit these distributions." this is from the linked IRS article you cite. The implication is they may not permit this. I don't understand how they can refuse, but if the old employer refused, you'd have to go to the new and may lose the match anyway. – JoeTaxpayer Mar 8 '12 at 18:57
  • "returned to you from any of the plans that permit these distributions."... "The implication is they may not permit this." and if both plans prohibit such returns, there may be a huge problem with excess contributions to a 401k – Dilip Sarwate Mar 8 '12 at 19:35
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The law limits what you can contribute to your 401k. It is your responsibility to make sure that you stay with in that limit. There are some pretty severe penalties for violating these laws. Especially if they can show that you did so knowingly and intentionally with the intent to defraud.

If what you are looking to do is just get the most dollars for your match your company will probably withdraw the match for any over-payment as well. Chances are at your new employer you would have a vestment period of 3-7 years to fully vest your match amount anyway. And many employers do their actual match contribution at the end of the year in a lump sum. One reason is to prevent the type of fraud you are talking about. Another is if you leave in the middle of the year then you may forfeit your employer contribution for that year. You would need to look at the details of your employers 401k to be sure.

What you are suggesting if it works out the way that you want might be prosecuted as fraud. It would seem ethically to be that. Whether it would meet the burden of the law in your area I do not know.

UPDATE: Upon rereading I am not sure that you are trying to do what I originally thought(get a matching amount you are not entitled to). I Think you still run the risk of one(or both) of the companies thinking that you are trying to defraud them. You also run the risk of the IRS deciding that you are trying to evade taxes. You can probably win either case at trial, but is it worth the risk. If the companies decide you are trying to defraud them you will sour your relationship with them. If the IRS decides you are trying to evade taxes they have a good record of winning. Probably because while they may decide you did not break any rules here the tax code is circular enough they can probably find something that you did wrong elsewhere in their audit.

  • Please cite where the fraud part comes in, and if it's actually fraud, why do IRS regs specifically address the issue of contributing over the limit? – JoeTaxpayer Mar 8 '12 at 23:34
  • @JoeTaxpayer - The fraud comes in where you are attempting to gain benefit threw an omission in a required disclosure. I do not know that it would meet the legal burden in court. I suspect that a good prosecutor could make the case. The laws involved could include more than just the IRS regulations. – user4127 Mar 9 '12 at 16:50
  • If littleadv response is correct, i.e. an employer is required to ask the question about YTD deposits, you may be correct. But that begs the question - if such diligence is in place, why does the IRS have the procedure to withdraws excess deposits? Against whom is the fraud perpetrated? Not the government. Perhaps the new employer? – JoeTaxpayer Mar 9 '12 at 18:58
  • @JoeTaxpayer - The OP is asking about "Gaming" the system. Specifically he wants to get funds from his employer match that he is not entitled to because effectively when the funds that are being matched are withdraw it is like they were never contributed. The overpayment into the 401k is not a big deal. It would be the attempt to essentially steal money from your employer that gets you. I have modified my first paragraph to specify the fraud intent that I thought was implict. – user4127 Mar 9 '12 at 19:10
  • I'm guilty of using the word "gaming", but as I use it, it's distinct from fraud. mhoran cites the 'normal' limit of 8% or so. (I agree) One can make the case that if I start a job with such a match, it's part of my package. It's I who is getting ripped off by being unable to get that match. The new employer expects to pay it out. I also expect the resolution is to withdraw the excess from the first employer who has no match. Again, if littleadv is correct, the point is moot. I agree a lie creates fraud. – JoeTaxpayer Mar 10 '12 at 1:45
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"Since the new employer doesn't know how much I may have contributed,"

The employer does know. If you start your job in the middle of the year, the employer will not let you contributing to the 401K plan they sponsor, unless you disclose how much you've already contributed to other 401K's that year.

  • Thought I'd wait a bit, and ask you - Is this your observation, or the current rule when starting a job? If it's a rule, then why the need for IRS regs regarding depositing too much? – JoeTaxpayer Mar 14 '12 at 18:45
  • Its my observation, but I believe they wouldn't do it unless it was a plan requirement. – littleadv Mar 14 '12 at 19:19
  • As an engineer you can understand the loop I am in. If it's a rule, lying is fraud (lying bad in any case). If not a rule, the OP's intent is actually logical, so long as no lie is involved. Planning to withdraw excess first first employer hurts no one. +1 thanks for response. – JoeTaxpayer Mar 14 '12 at 19:38
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If you end up contributing too much to your 401(k)s due to having more than one employer, you could end up with double taxation, once on the excess contribution in the year you contributed and once on the withdrawal of the excess in the year you corrected the excess contribution.

To prevent this, you need to take a corrective distribution by April 15 of the year following the excess contribution. To be completely corrective, this distribution must include the excess contribution plus any earnings on that excess contribution.

You may choose to take the corrective distribution from either employer, it need not be taken on the last contribution from the second employer, but could, by your choice, be taken on the earlier contribution with the first employer, or some combination of both to back out the total excess and earnings on the excess. You may also choose how to allocate between contributions with either employer that you may have made as either Roth 401(k) or traditional 401(k).

However, be forewarned, it is possible that your former employer may not cooperate with your request and force you to make the correction of the excess with the new employer.

In summary, you may choose how best to back out the excess and earnings to provide the best financial planning for your circumstances, which might involve maximizing your employer match across the two employers, just be sure to resolve all excess before April 15 of the following year.

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I agree what you are proposing is complicated. The math could be the problem. Most companies don't match an unlimited amount. The best match I ever had was if I put in 8% they would put in 8%. Other companies would only put in 4% if I put in 8%.

Therefore you will reach the maximum percent match at lower rate than the percentage needed to reach the IRS limit, unless your salary is very high.

You will be able to do this easier if you can put money away after taxes. That after-tax money can exceed the $17,000 pre-tax limit.

In order to do what you propose you will need enough time to change your contribution rate (easy), know when your last paycheck will be, and have enough time for the numbers to work. You will also have to know when you will be starting a new job far enough in advance to work the numbers.

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