I have worked as a software contractor before, for a company and they didn't have 401(k) plan at all.

And then I have worked at a different company, with something like, we can contribute, and for the first 4.5%, they'd match 100%. So most people put in 4.5% or 6%, and it was possible to buy stocks or any mutual funds or ETF through Fidelity's BrokerageLink.

And then I ran into another software contracting agency's plan: we can put in 0% to 100% of our salary, and they don't match anything, and into Wells Fargo, so it seemed like it is limited to some 25 funds, including a T. Rowe Price growth fund, and an S&P 500 index fund.

It seems strange then: does it mean we can put in 20% or 30%? There is also a "catch up contribution percentage" -- which I don't understand: won't the regular contribution just become more and more to fill in the amount for the catch up amount? Why do we specifically contribute a "catch up amount"? And since we can't invest in QQQ or AAPL or GOOG, isn't it always possible, at least after some time, transfer that amount over from Wells Fargo to Fidelity, so that it can go into BrokerageLink and let us buy any ETF or stocks or mutual fund? The agent on the phone sounded like if I do that, it is early withdrawal and we'd be subject to penalties.

  • 3
    It is very hard to understand what your question is. Can you clarify what you are asking? – JohnFx May 6 at 14:04
  • Contractors cannot participate in 401(k) plans which are restricted to employees as an employee benefit. So, whether the company that you contracted with had a 401(k) plan or not would not have affected you. The other two companies that you worked for as an employee (got a W2 from them, not a 1099-MISC) allowed you to contribute to their 401(k) plans. And no, in general, you can't transfer money from one 401(k) plan into another 401(k) plan even if both plans have the same administrator, let alone when they have different administrators. – Dilip Sarwate May 6 at 21:07
  • @DilipSarwate It's not clear whether these were W-2 or 1099 positions. In my experience, the word "contractor" often refers to a W-2 employee of a staffing agency who is contracted out to a client. When I was such a contractor, I worked 40 hours a week at the client's site and never went to the agency's office, but the agency gave me my paychecks and W-2s. – Tanner Swett May 6 at 21:45
  • I believe that you may be a little confused, the "you can put in 0% to 100% of your salary" is not specific to that plan or employer. Every plan allows that (other than not letting you put up to 100%, as explained by Justin Cave's answer). – Captain Man May 6 at 22:06

The IRS limits the amount of your salary you can defer into a 401(k). In 2021, that limit is $19,500 but it changes year-to-year. If you are over 50, you can make an additional $6,500 catch-up contribution. The employer may not set an upper limit on the percentage you can defer but you will be limited in the total amount you can defer.

401(k) plans may allow you to roll over funds to an IRA while you are still employed but they need not. If your plan doesn't allow in-service rollovers, you'd be stuck with whatever funds the plan makes available so long as you are employed there. Once you leave that employer, you'd be able to roll over the 401(k) to an IRA with a wider array of investment options.

  • 2
    With the contracting agency's "0% to 100%" plan, it sounds like they are not taking responsibility for keeping your contributions under the limit. So the individual contractor should carefully choose the contribution so as not to exceed the limits mentioned by Justin Cave. – Orange Coast- reinstate Monica May 6 at 16:11

Each 401(k) plan (or 403(b)) is an individually-tailored plan developed by collaboration between the employer offering the plan and the financial institution providing it. Some big-picture items are defined by law and/or IRS rules, but the rest will vary from plan-to-plan.

Generally applicable to 401(k):

  • Employee voluntary contribution (total of pre-tax plus Roth, if part of plan) is limited. There is a "catch-up" provision that allows older employees (over age 50) to contribute an additional amount. Currently these limits are $19,500 per year, with an additional $6,500 allowed for employees over 50. These limits tend to increase over time (but not necessarily every year); the IRS typically announces the new limits for each year ahead of the calendar year.
  • Total contributions (all employee contributions, including those not covered in the first bullet, plus all employer contributions) are capped as well. Currently, this limit is $57,000 per year (plus the $6,500 catch-up for employees over 50)

Plan-specific variations:

  • Matching - how much an employer contributes (if anything) to a plan is up to the individual employer.
  • Roth option - some plans allow Roth contributions, and some do not
  • Additional after-tax non-Roth contributions - sometimes allowed, can possibly be used for "mega backdoor Roth IRA" if plan allows
  • Loans - whether a plan allows loans, and what rules are in place for taking an repaying a loan, can vary
  • In-service withdrawals - whether you are allowed to withdraw money from the plan while still employed by the employer offering the plan
  • In-service conversion - whether you are allowed to convert pre-tax money in your 401(k) to your Roth 401(k) while still employed by the employer offering the plan (this is a taxable event; the converted money counts as income)
  • Investment options - Money in a 401(k) can only be invested in funds that are offered as part of the plan. Some plans have a very wide variety of choices (as you saw with BrokerageLink), while others have very few. Note that once you move the money to another account (roll to an IRA or another 401(k)), you can invest it in anything you like (potentially subject to similar limitations of the new 401(k) plan)
  • Fees - The financial institution may charge you a fee directly for the plan. The fee may be collected as part of the investments. Depends on the specifics of the plan.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.