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It looks like my wife's employer is limiting her 401K contributions to 15% of her salary. This means we cannot max out the $17.5K contribution limit set by the IRS. Say her salary is $70K and we are limited to $10.5K – that leaves $7K of pre-tax contribution limit that we cannot make use of.

This seems to be legal for the employer to do (Can my employer limit my maximum 401k contribution amount (below the IRS limit)?), but odd since we want to make use of all pre-tax savings opportunities we have and really want to max out the full $17.5K.

What options do we have to max out the pre-tax contribution limit? Is it possible to contribute to the 401K from after tax salary and ask for a refund? Can we pressure the employer to raise the limit for her?

Unfortunately, our combined income is above the allowed combined income to fund an IRA, so we cannot contribute to IRA or Roth IRA.

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    hm. 70k doesn't seem like a high earner - can they limit your contributions as a non high earner?
    – im so confused
    Commented Jan 28, 2014 at 19:58
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    Your only option is to pressure the employer. 401(k) contributions have to be funded with paycheck deductions.
    – stannius
    Commented Jan 28, 2014 at 20:50
  • Does that limit apply to both 401k and Roth?
    – NL - SE listen to your users
    Commented Jan 28, 2014 at 22:40
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    Look into backdoor Roth IRA contributions. Your question still stands and is a good one regardless though.
    – Craig W
    Commented Jan 28, 2014 at 23:06
  • "Unfortunately, our combined income is above the allowed combined income to fund an IRA, so we cannot contribute to IRA or Roth IRA." You are correct about not being able to contribute to a Roth IRA but you and your wife can always make non-tax-deductible contributions to a Traditional IRA and do a backdoor Roth conversion if you wish. The nondeductible money in the Traditional IRA will not be taxed again when it is withdrawn from the IRA, though earnings from that money will be taxable. Be sure file Form 8606 with your tax return, and keep a copy in a safe place for later use.
    – Dilip Sarwate
    Commented Jan 29, 2014 at 3:32

3 Answers 3

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"Unfortunately, our combined income is above the allowed combined income to fund an IRA" - Sorry, not to be nit-picky, but you can deposit to a traditional IRA, you just may not be able to deduct it. As Craig hinted in a comment, if you have no existing IRA money, you can deposit, wait a moment, then convert to Roth. So the money is taxed, but never to be taxed again. If you do have an existing IRA, you'll have to prorate the converted amount, and pay tax on the pretax money you're converting.

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There is an approach that might help you stash more cash ($3,300 -$6,650) for retirement pre-tax, but it only works in a pretty specific situation.

If your employer has a qualified HDHP insurance plan and it makes sense* for you to enroll in it, then you will be eligible to set up and contribute to a Health Savings Account (HSA) and contribute to it on a pre-tax basis.

In 2014 the contribution limit was $3,300 if you have an individual health plan, or $6,650 if you also cover your family on the policy. Of course this money is supposed to be for use on qualified medical expenses and there is a pretty steep penalty if you use it for anything else.

HOWEVER, there is a twist. After you turn 65 you can take the money out for anything you want without paying the penalty. You will still need to pay taxes on the distribution then, but at ordinary income tax rates similar to an IRA distribution.

Also, this approach gives you a tax free way to pay for medical expenses from the fund if you run into a bad patch healthwise, so it can double as a limited purpose rainy-day fund too (for a very specific kind of rain).

See also IRS Publication 969

* An HDHP plan does involve more financial risk (paying for medical bills up to a high deductable) and may not be the right choice for every family. However, if you have enough cash in the bank to not be financially destroyed by the possibility of up to around $10K of medical expenses out of pocket, it is something worth considering.

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    The HDHP is great if the employer offers such a plan. Past age 60, you're far more likely to need to spend the money on health related expenses, and that will come out tax free. So an HSA is better than either a pre-tax IRA or a Roth IRA. Money goes in pretax, but for medical expenses, comes out with no tax.
    – JTP - Apologise to Monica ♦
    Commented Jan 29, 2014 at 12:39
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You don't have a "right" to contribute to the limit. You can only contribute in the way they let you. In fact, even if the employer allows it, you may still not be able to reach the limit because there are restrictions on how much Highly-Compensated Employees are allowed to contribute.

Just be glad that the employer provides a 401(k) at all. If they didn't, your alternative pre-tax contribution would be deductible Traditional IRA, which has a much lower limit ($5500 for 2013).

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