Over contribution to 401K between two employers, and maximizing employer match? [duplicate]

Question

I have a situation like this:

I worked for an employer this year from January to May and contributed $14,500 to my 401K. There was no matching from this employer. In mid-May time frame, I changed jobs and my new employer matches $0.90 to every dollar, up to a maximum of 5% of base salary in 401K/Roth IRA. Since the 2013 401K individual contribution limit is $17,500, I would like to take advantage of my employer contributions to maximize my tax free gain. How can I do this? Please suggest my options.

Reading thru the web, I came to know that employer contributions do not count towards the $17,500 individual 401K limit. Is this correct? Can I contribute up to $17,500 before-tax in my 401K and still get employer matching, let's say $3000, on top of that? Which will take my 401K total contributions for this year to $20,500? Please advise.

Answer 1

Your total contribution to 401k plans is limited to $17,500 for 2013. Employer matching contributions do not count towards the $17,500 limitation, as you have already found out.

You have contributed $14,500 for 2013 to your 401k plan with your previous employer. What if between the two plans, you have already exceeded the 401k contribution limitation for 2013? Well, the excess must be withdrawn. You have to inform your employer no later than April 15, 2014 that an excess contribution has occurred, and the excess contribution and all earnings attributable to the excess contribution must be withdrawn no later than that date. Note: it is April 15, period, of the year following the one in which the excess contribution occurred, and not the day that the tax return is due which may be April 16, 17 or even 18 depending on weekends, District of Columbia holidays, etc. If the money is withdrawn by April 15, and if the contributions were pretax contributions, then the excess contribution is included in the gross income for the year in which the excess contribution occurred, while the earnings on the excess contributions are included in the gross income for the year in which they were withdrawn. Both these amounts will be reported to you and the IRS on Form 1099-R. Note that there is no penalty for early withdrawal etc. on these amounts as long as the April 15 deadline for withdrawal is met. But here is a an interesting point:

You can ask any of the 401k plans to which you contributed in 2013 to return the excess deferral, and not necessarily the last one to which you contributed.

Thus, subject to a caveat, I would suggest contributing enough to your new employer's 401k to capture all the matching contributions available (maybe even the full $17,500) and asking your previous employer's plan to return whatever excess deferral you end up making as a result. You don't need to wait till April 15, 2014 to do this; it can be done in 2013 too if cash flow is a problem.

So what is the caveat? The IRS guide on 401k deferrals says

If the total of your elective deferrals is more than the limit, you can have the difference (called an excess deferral) returned to you from any of the plans that permit these distributions. (emphasis added)

which hints at the possibility that some 401k plans might not permit withdrawal of excess contributions. It might be worthwhile to check if your ex-employer's plan falls in this restrictive category. If it does not allow you to withdraw the excess, you will need to take the excess out of your current employer's 401k, possibly losing some of your employer's matching contributions.

Answer 2

Check your plan documents to see if the company has an after tax option, not all companies do. This isn't the same as the Roth 401K option. The after tax option will not save on taxes this year, and it will not grow tax deferred, but it will allow you to maximize the company match with your new company.

You need to calculate how much per pay check to contribute to the 401K, Roth 401K, and after-tax 401k. This can get tricky because most companies want you to specify the amount to be withheld in whole percentages. You may have to make several adjustments during the rest of the year. If 2.5% would be perfect then 1/2 the checks will have to 2% and 1/2 will be 3%.

Make sure that you err to be slightly short of the $17,500 limit. It can be painful to correct. In a normal year a single employer will not let you go over the limit, your new employer has no way of knowing what you contributed to the first company.

The IRS limit for regular 401K and Roth 401K is $17,500 for 2013. There is also the $5,500 catchup contribution for employes who will be 50 or over this year. This total doesn't include company match. The IRS does set a maximum total for everything at $51,000 for 2013.

One feature of the after-tax 401K is that is can be rolled into a Roth IRA when you leave the company.