If I max out my 401k mid-year from personal contributions, what happens to the employer safe-harbor match left behind?

I reached $16,500 from personal contributions this year (2009) in my 401k around September. If I had spaced it out all year, I would have earned an additional ~$1400 for my 401k from my employer's 4% contribution. What happens to the rest of the $1400?

Do I loose it for contributing too much too soon? Asked by pjkas 26 months ago Similar questions: max 401k mid year personal contributions employer safe harbor match left Business > Jobs.

Similar questions: max 401k mid year personal contributions employer safe harbor match left.

Your employer can use either a matching contribution formula or a non elective formula I don’t know which one your employer is using, so you will have to check with the plan administrator or your HR office. There are two formulas. The base formula is 100% of elective deferrals up to 3% of compensation and then 50% of elective deferrals on the next 2% of compensation.

Matching contributions may not be made with respect to an employee’s elective deferrals in excess of 6% of your compensation. The employer may elect the non-elective formula (minimum of 3%) of all eligible participants’ compensation. Under this method, all eligible employees would receive this non-elective contribution whether making salary reduction contributions or not.It looks like your company is using the first formula.

Part of the 401(k) Safe Harbor rules states that the employer contributions must be deposited by the time the corporate tax return with extensions is filed for the tax year in which the deduction is being taken. The matching contributions made your employer are NOT counted toward your 401k contribution limits. Even if you contribute the maximum amount each year, your employer's matching contributions are in addition to these 401k limits.

(Remember: Depending on the design of its 401k plan, a employer can match up to and including 6% of your pre-tax compensation. ) Note: Several different 401k rules apply in addition to the overall contribution limits. The absolute maximum you can contribute will depend on your salary and the type of 401k plan in which you are participating.

Review your employer's plan documents to see when or if the remaining match will be added to your account. As a CFP, I have never run into a situation where the maximum is reached before the end of the year. For those clients who insist on putting the maximum in a 401(k), I have them spread the contribution amounts over 12 months.

I advise all my clients to never put more than 7% of total income in a 401(k) or other qualified plan. Here are some of the reasons for my recommendations. Don’t try to put the maximum into a 401(k).

A good rule is not to start your 401(k) until you are setting aside 15% of annual income in safe, fixed, saving vehicles like money market accounts, savings accounts, CD’s etc. , until you have at least 50% of one years income. If you research some of the questions here on Askville, one of the things you will see asked most often is, "how do I get money out of my 401(k)? " This comes up because too many people started putting the maximum in the retirement account before have liquidity someplace else.

Then when they need money in an emergency, (laid off, medical, disability,) they reach for the only large source of money they have, the 401(k).(Then they face tax and penalty.) Once you have 50% of one years income saved, start the 401(k) using 7% of the 15% or up to the company match, whichever is greater. The other 8% should be moved into an investment portfolio outside the 401(k) that fits your investment risk profile.401(k) plans are tax deferred plans, not tax advantaged plans. Too many financial planners interchange the terminology.

A 401(k) allows you to deferrer taxes. This means there is part of your 401(k) that you will never have access to. Most people don’t understand the tax savings is locked in the plan.

You never have access to it, that is why it is deferred. For example, if you were to put 7% of $100,000 ($7,000) each year for the next 35 years at 5%, you would accumulate $663,854. $100,000 of income would put you in the 28% tax bracket if single, so you would save $185,879 in taxes.(This assumes you always earn $100,000 a year) Assuming you are in the same tax bracket at retirement (28%) you will owe $185,879 in taxes, exactly the same that was deferred.

You never got to spend the $185,879. You are left with $477,975 to spend. Don’t think you will be in a lower tax bracket at retirement.

Most people are in the same or higher. And with the way the government is spending money, there is a good chance you tax bracket at retirement could be double what it is now. That means you will give back twice what you got credit for.

Remember, you give up almost all money control with a qualified plan. In 1973 when the first IRA law was passed, top marginal tax brackets were 70%. Equity investments inside a 401(k) are taxed at ordinary income rates instead of capital gain rates.So any mutual funds or stock you sell inside the 401(k) at retirement will be taxed at ordinary income tax rates, (as high as 35%) instead of the capital gain rate of 15% outside the plan.

You can not tax deduct investment losses inside a 401(k). You can if the investment losses are outside the plan. The government has a Required Minimum Distribution rule at age 70 1/2 that says you must start taking money from your 401(k) whether you want to or not.

This distribution is based on a government table. http://www.bankrate.com/finance/money-guides/ira-minimum-distributions-table.aspx.The figures are the same for IRA and 401(k). This means you have no control over how much income you take after age 70 1/2.

You must take the minimum. This gets added to interest, dividends, Social Security, pensions and any other income source you have to determine your taxable income for that year. Here is a calculator to let you play with a 401(k) balance to see what the minimum is.

http://www.cpasitesolutions.com/content/calcs/RetireDistrib.html.Notice how clever the government is. If you just take the minimum, the amount you need to take each year increases, pushing you into a higher tax bracket.(Unless you have a major loss inside the plan.) Watch out for plan fees. Some of these 401(k) plans can have very high fees, (150 to 200 basis points, 1 1/2% to 2%.

) These fees can really eat into your account balance over the years. Make sure you have a well planned exit strategy. Most people have good entrance strategies, but never look at the tax consequences, minimum distribution calculations, or what can happen if tax laws change.

Besides all of the above, here is a link to a site that list 10 signs of a fishy 401(k). http://www.fool.com/personal-finance/general/2007/02/23/10-signs-of-fishy-401ks.aspx.Take a good hard look at your plan. Do the math to see what your account balance will look like at retirement time.

What are the Required Minimum Distributions? What tax bracket will you be in? How much money will you lose in taxes each year?

Make sure your beneficiary designations are correct. Being proactive now can prevent big problems in the future.

WEALTHADVISOR Point #3Good advice all around but I had a question. You say an income holding everything constant of $100,000 would put a person in the 28% tax bracket. I agree, the dollars after (comments are 20 months old so I'll use 2009 tax brackets) $68,525 are taxed at the 28% bracket.

But where did you come up with $185,879? I realize that is simply 28% of the $663,854. If you retired at a penalty free age (59 1/2-70 1/2) and took it as your assumption of 100k/yr, the total tax would be $146,923 leaving $516,931 ignoring interest earned after the first year's taxes (6.64 years multiplied by $22132 of tax per year if income was 100k).

Or, if you took the lump sum at maturity, the tax would be $217,545 leaving $446,309. Obviously, brackets change, laws change, etcetera but the difference in the way of a lump-sum payment or an annuity of sorts using the 100k/year in retirement assumption in this example is $70,622 in taxes alone. I don't disagree with any of your other points but I think it is important to note how lump sum payments versus annuity streams regarding 401k distributions can be quite different.

1 In theory, they should make good on the "match". In practice, it makes sense not to max out early, but to time it to max out at the end of the year. Don't trust them when there is no reason to do so.

I'd get a firm statement from your firm about their policy, and then carefully check to see that the money is deposited. Unfortunately, when the markets are going up rapidly, it may also make sense to max out early in the year, so you are investing the money at lower prices in the markets.

In theory, they should make good on the "match". In practice, it makes sense not to max out early, but to time it to max out at the end of the year. Don't trust them when there is no reason to do so.

I'd get a firm statement from your firm about their policy, and then carefully check to see that the money is deposited. Unfortunately, when the markets are going up rapidly, it may also make sense to max out early in the year, so you are investing the money at lower prices in the markets.

2 That's what I was thinking. I'm just not sure if this is plan-specific or if there are rules governing this type of activity. At the end-of-the day, I'm hoping that there is a rule that the employer must complete the catch-up contribution.

That's what I was thinking. I'm just not sure if this is plan-specific or if there are rules governing this type of activity. At the end-of-the day, I'm hoping that there is a rule that the employer must complete the catch-up contribution.

5 I did get confirmation from my employer that unmatched contributions will be matched, along with the interest it would have accrued, around Q2 of 1020. Great! .

I did get confirmation from my employer that unmatched contributions will be matched, along with the interest it would have accrued, around Q2 of 1020. Great!

In finding the max contribution of a 401k, what if your employer contributes more than 6%.

Are 401k employer safe harbor payments made for LLC members expensed to the LLC or deducted on the members' individual t.

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