Can someone explain the 401k maximum contribution limits? Does whether I put away money pre or after tax effect these? Generally what are they and what does it mean?
They are tax deductible. So if you earn $100k and put $10k in the 401k, you report income of $90k on your 1099, and only pay taxes on that $90k. You can contribute up to $18.5k (check the number) this year in this manner. After tax retirement account is called a Roth IRA - you contribute after tax income and don’t get taxed on withdrawals.
You can actually contribute more than $18.5k through employer matching. So, for instance, if your company has a policy of matching 100% of 401k contributions, you can contribute $37k max in the year. You might get other company contributions through earnings distributions or other events. Overall, your max possible contribution, I believe, is in the range of $50k, even if you have direct control of only $18.5k of that.
Ok, so if I put in $18.5k I’m still clear. If I exceed that is it a problem, or does it just mean I don’t get the tax benefit? What difference does it make if I contribute pre-tax or after-tax and which is better?
Sorry, I just came to realize that I’m basically flying blind on my 401k sticking money into it without any real idea of what I’m doing.
^If you exceed the max, you get a check at the end of the year.
Be careful though. You’ll hear people bragging about maxing out their 401k by March but that could be less than ideal. The way our company does payroll, I would miss out on some of my company’s match if I don’t spread it out throughout the year.
Edit: As for doing pre or post tax, it’s the same arguement as ROTH vs Traditional IRA. Just depends on if you think you’ll be in a higher tax bracket when you retire.
Also, if you have a brokerage window in your 401k you want to use, generally it has to come from pre-tax money. I split mine down the middle just because.
Assuming these are all serious questions - it is generally impossible for you to exceed the contribution limit, since the deductions are managed by your employer. You are responsible for specifying what percentage of each paycheck you want to contribute. Once you hit the contribution cap, your employer should stop deducting the contribution from your paycheck. So, unless your employer makes a mistake, you will not exceed $18.5k.
Which is better between pre and post tax - it depends on your predicted marginal tax rate at the time of withdrawal relative to your current marginal tax rate. If you believe your current tax rate is higher (which is the case for most people), you should contribute now and take the deduction. If you believe your future tax rate will be higher, you should pay normal income taxes, contribute post tax, and save on taxes later.
18k ohai
http://www.401khelpcenter.com/2017_401k_plan_limits.html
this is where gman shows up and explain all in layman terms
I would think the opposite is true (of the bolded part). Although not sure how it works if you are retired and not working while you are taking distributions. Is your tax bracket based on passive income? If so, I guess I’d agree with the bold.
If you are with 1 employer the entire year, I don’t think you can exceed $18.5k. The plan admin will likely flip you to after-tax contributions. That’s how it works for my dad’s 401k.
I would still be very careful though… if you over contribute on accident it can be a pain in the ass. I changed jobs last year and maxed out my 401k at my new employer but forgot I had a few paychecks that hit in 2016 from my prior employer, where they made pre-tax contributions. I exceeded the 18.5k limit, had to call my employer’s 401k person, they had to call the brokerage, they issued a refund of the overpayment, and then I had to file taxes on that as misc. income. I’m supposed to get a 1099-R in 2018, for the 2017 tax year, yet ignore it because I effectively amended my 2016 return)
TLDR: DO NOT OVERCONTRIBUTE
edit, 18k, like igor said.
Any though as to whether its better to fill up the 18.5k as soon as possible and therefore increasing market exposure or spacing it out equally over the year to maximize dollar cost averaging? I’m assuming your employee match is equal in both instances.
Ok, thanks guys, just got off the phone with the retirement plan people too. I finally have some sort of handle on the situation (I think). So basically my takeaway is that you can contribute $18k a year to 401k (pre tax) and $18k a year to Roth (after tax). I’m still a little fuzzy on whether pre or after tax is better and why, so would appreciate simplified explanations on that. I’ve always been pretty laissez fair about planning and am trying to step things up a bit w/r/t the knowledge base.
If anyone has any other good savings type recommendations or insights I’d be glad to hear them.
Next thing I gotta tackle is healthcare. I have literally no clue what’s going on with my health insurance, right now I just pick the more expensive plan and hope for the best.
i like maxing it earlier in the year and topping out SS contributions, that way during the holidays, I got more money to spend on my hoes.
$5.5k max in a roth or traditional. Also, don’t forget about the income limits on the Roth.
Income limits on roth is $117k single/$184 married. If you exceed those, it gets tricky, depends on how much you exceed, just go traditional.
http://beta.morningstar.com/articles/682209/should-you-make-aftertax-contributions-to-your-401k.html
BS you gotta be trolling . This is simple tax planning.
^$18k all in. Not in each the Roth and pre-tax.
Let’s say you’re in the 25% federal income tax bracket right now and you’re putting all your money in a pre-tax 401k (or a traditional IRA). When you retire, the distributions you take out of that account are fully taxable. So, you first need to estimate how much you’ll be taking out each year and then see what tax bracket that puts you in. Say you want to live off the same income you have now. Do you think in 2050 your same income tax bracket will be higher or lower than 25%? If you think it’s going to be higher, pay taxes now (Roth). If you think it’ll be lower, go the pre-tax route.
They said 5.5k pre-tax max in roth (which works against your pre-tax limit for 401k), but after tax can be up to $18k.
Roth is phased out though for BSDs.
Not in your 401k. But it may not be advantageous to use it if you’re in the highest tax bracket right now.
It’s $18k all in, which you can split between traditional 401k and Rtoh 401k (if offered) anyway you want. Normal Roth limitations do not apply.
Also not sure what your 401k is like but for the majority of people IRA >>>>>>> 401k as the investment options in many/most 401ks I have ever seen blow monkey balls. So i think the rule of thumb is 401k up to your employer match then IRA/Roth up the the max is the ideal scenario. If you want to contribute more then to retirement you can put more in your 401k