Exceeded limit on tax deferred contributions?

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newbie007007
Posts: 4
Joined: Sat Jul 24, 2021 8:21 pm

Exceeded limit on tax deferred contributions?

Post by newbie007007 »

Hello Forum,

I am a long time lurker and first time poster. I believe I made a mistake by exceeding the limit on tax deferred accounts for the last two years. I don't have a financial advisor and file my own taxes. I contribute these amounts to my tax deferred accounts

401a (corrected, not 401k) = 8000
457b = 19500
403b = 19500
Individual IRA = 6000 (I do not receive tax credit, this is converted to ROTH each year)

My employer contributed 7640 in 2020 to my 401k which brings the total amount to 62640 including employer contributions and exceed the 58,000 limit. I did not understand that employer contributions count toward limit.

I filed my taxes and reported the ROTH conversion for the past two years. Do I need to take corrective action? What needs to be done?

Thank you
Last edited by newbie007007 on Sun Jul 25, 2021 10:31 am, edited 1 time in total.
mervinj7
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Re: Exceeded limit on tax deferred contributions?

Post by mervinj7 »

newbie007007 wrote: Sat Jul 24, 2021 8:43 pm Hello Forum,

I am a long time lurker and first time poster. I believe I made a mistake by exceeding the limit on tax deferred accounts for the last two years. I don't have a financial advisor and file my own taxes. I contribute these amounts to my tax deferred accounts

401k = 8000
457b = 19500
403b = 19500
Individual IRA = 6000 (I do not receive tax credit, this is converted to ROTH each year)

My employer contributed 7640 in 2020 to my 401k which brings the total amount to 62640 including employer contributions and exceed the 58,000 limit. I did not understand that employer contributions count toward limit.

I filed my taxes and reported the ROTH conversion for the past two years. Do I need to take corrective action? What needs to be done?

Thank you
Fortunately, IRAs also don't count towards the 415(c) limit of $58k. You are good to go.
Furthermore, 457(b) also have a separate limit.
Edit: but the 401k +403b is still subject to the employee contribution limit of $19.5k. are these two different employers?

https://www.irs.gov/retirement-plans/ho ... ement-plan
Last edited by mervinj7 on Sun Jul 25, 2021 8:19 am, edited 1 time in total.
Katietsu
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Re: Exceeded limit on tax deferred contributions?

Post by Katietsu »

Are the 401k, 457b and 403b with the same employer. If so, they should make sure you do not exceed any limits. Though, as mervinj7 explained, the $58,000 limit will include only the 403b and 401k, so you are not near exceeding that limit.
Soon2BXProgrammer
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Joined: Mon Nov 24, 2014 10:30 pm

Re: Exceeded limit on tax deferred contributions?

Post by Soon2BXProgrammer »

newbie007007 wrote: Sat Jul 24, 2021 8:43 pm Hello Forum,

I am a long time lurker and first time poster. I believe I made a mistake by exceeding the limit on tax deferred accounts for the last two years. I don't have a financial advisor and file my own taxes. I contribute these amounts to my tax deferred accounts

401k = 8000
457b = 19500
403b = 19500
Individual IRA = 6000 (I do not receive tax credit, this is converted to ROTH each year)

My employer contributed 7640 in 2020 to my 401k which brings the total amount to 62640 including employer contributions and exceed the 58,000 limit. I did not understand that employer contributions count toward limit.

I filed my taxes and reported the ROTH conversion for the past two years. Do I need to take corrective action? What needs to be done?

Thank you
More information is needed about the types of contributions and how many employers.

If you made a 8k pretax contribution to the 401k and a 19500 pretax to the 403b as both employEE contributions, then yes you have a problem. What tax software do you use to file your taxes? I was under the impression turbotax would have caught this when you filled out your W2's.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
lakpr
Posts: 11519
Joined: Fri Mar 18, 2011 9:59 am

Re: Exceeded limit on tax deferred contributions?

Post by lakpr »

The 401k + 403b contributions do exceed the IRS limit of $19,500. If you filed taxes on your own, your tax software should add $8000 back as Miscellaneous Income. You will be taxed again on this $8000 when you eventually withdraw from 401k or 403b account, if you do nothing.

That is about the only adverse impact you will have.
silverlitegs
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Re: Exceeded limit on tax deferred contributions?

Post by silverlitegs »

lakpr wrote: Sun Jul 25, 2021 5:00 am The 401k + 403b contributions do exceed the IRS limit of $19,500. If you filed taxes on your own, your tax software should add $8000 back as Miscellaneous Income. You will be taxed again on this $8000 when you eventually withdraw from 401k or 403b account, if you do nothing.

That is about the only adverse impact you will have.
If hes over 50 I believe the limit would be more than 19.5k
lakpr
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Re: Exceeded limit on tax deferred contributions?

Post by lakpr »

silverlitegs wrote: Sun Jul 25, 2021 6:20 am
lakpr wrote: Sun Jul 25, 2021 5:00 am The 401k + 403b contributions do exceed the IRS limit of $19,500. If you filed taxes on your own, your tax software should add $8000 back as Miscellaneous Income. You will be taxed again on this $8000 when you eventually withdraw from 401k or 403b account, if you do nothing.

That is about the only adverse impact you will have.
If hes over 50 I believe the limit would be more than 19.5k
Right, but the amounts being mentioned by the OP ($19,500 and $58,000) strongly indicate he isn't over 50..
uslee2004
Posts: 261
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Re: Exceeded limit on tax deferred contributions?

Post by uslee2004 »

newbie007007 wrote: Sat Jul 24, 2021 8:43 pm Hello Forum,

I am a long time lurker and first time poster. I believe I made a mistake by exceeding the limit on tax deferred accounts for the last two years. I don't have a financial advisor and file my own taxes. I contribute these amounts to my tax deferred accounts

401k = 8000
457b = 19500
403b = 19500
Individual IRA = 6000 (I do not receive tax credit, this is converted to ROTH each year)

My employer contributed 7640 in 2020 to my 401k which brings the total amount to 62640 including employer contributions and exceed the 58,000 limit. I did not understand that employer contributions count toward limit.

I filed my taxes and reported the ROTH conversion for the past two years. Do I need to take corrective action? What needs to be done?

Thank you
OP, how do you get to 58000? Am I missing something?
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retiredjg
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Re: Exceeded limit on tax deferred contributions?

Post by retiredjg »

newbie007007 wrote: Sat Jul 24, 2021 8:43 pm 401k = 8000
457b = 19500
403b = 19500
Individual IRA = 6000 (I do not receive tax credit, this is converted to ROTH each year)
Welcome to the forum. :happy

Ignore the 457b contribution of $19,500. It has a separate limit and is not involved here. The IRA is not involved either.

Is the 401k a Solo 401k? If yes, was the $8k an employee contribution or an employer contribution?

If the 401k is not a Solo 401k, was the $8k an after-tax contribution? I don't mean a Roth contribution. And after-tax contribution is something different.


My employer contributed 7640 in 2020 to my 401k which brings the total amount to 62640 including employer contributions and exceed the 58,000 limit. I did not understand that employer contributions count toward limit.
I'm not sure this has anything to do with the plan limit of $58k or with employer contributions. I think it may be more related to exceeding the $19.5k you are allowed for elective deferrals.

In addition to the above, tell us these things.

How many employers are there and which accounts belong to which employer?

What is your age?
Topic Author
newbie007007
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Re: Exceeded limit on tax deferred contributions?

Post by newbie007007 »

Thank you all for your comments. I made an error when listing my contributions because I have a 401a, not a 401k. I will correct my original post.

As @mervinj7 and others commented if 457 and Individual IRA do not count towards the 58000 limit, then I should not have a problem. I wonder if 401a counts towards the 58000 limit?


My age is under 40
All of these accounts are with the same employer (UC system)
lakpr
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Re: Exceeded limit on tax deferred contributions?

Post by lakpr »

newbie007007 wrote: Sun Jul 25, 2021 10:30 am Thank you all for your comments. I made an error when listing my contributions because I have a 401a, not a 401k. I will correct my original post.

As @mervinj7 and others commented if 457 and Individual IRA do not count towards the 58000 limit, then I should not have a problem. I wonder if 401a counts towards the 58000 limit?


My age is under 40
All of these accounts are with the same employer (UC system)
No, 401(a) limit does not count towards the $58k limit either. 401(a) are MANDATORY employee contributions towards pension plans, they are not voluntary and therefore the limits do not apply to them.

With your edited post, then, it seems you have no excess contribution at all, in any account.

The only thing I see as a potential issue is that, you are deferring $62k per year into tax-deferred accounts, including employer contributions. Assuming at least 20 years away from retirement, that would result in about $2.5 million, assuming a 6% real return rate (and therefore the ending balance is in today's money). A 4% withdrawal from this balance would put you squarely into 22% tax bracket today, which is scheduled to go up to be 25% bracket in 2026.

You *MIGHT* want to make the 403b contributions for the next 4 years as Roth 403(b).
Topic Author
newbie007007
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Joined: Sat Jul 24, 2021 8:21 pm

Re: Exceeded limit on tax deferred contributions?

Post by newbie007007 »

lakpr wrote: Sun Jul 25, 2021 12:48 pm With your edited post, then, it seems you have no excess contribution at all, in any account.
Yes, thanks for the comments from the forum. I was listening to discussion on the excess contributions topic and confused myself into thinking I was making an error. I made the decision carefully at the time, but I did not remember the specifics.
lakpr wrote: Sun Jul 25, 2021 12:48 pm
The only thing I see as a potential issue is that, you are deferring $62k per year into tax-deferred accounts, including employer contributions. Assuming at least 20 years away from retirement, that would result in about $2.5 million, assuming a 6% real return rate (and therefore the ending balance is in today's money). A 4% withdrawal from this balance would put you squarely into 22% tax bracket today, which is scheduled to go up to be 25% bracket in 2026.

You *MIGHT* want to make the 403b contributions for the next 4 years as Roth 403(b).
Our current household income is high. Combined with spouse and after all the qualified deductions we are still taxed on 380 - 400k, so deferring taxes seems prudent at this time. Our thought is to hit a specific number in tax deferred accounts and reevaluate strategy if incomes still remains high at the time. Does this make sense?
lakpr
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Re: Exceeded limit on tax deferred contributions?

Post by lakpr »

newbie007007 wrote: Sun Jul 25, 2021 2:25 pm Our current household income is high. Combined with spouse and after all the qualified deductions we are still taxed on 380 - 400k, so deferring taxes seems prudent at this time. Our thought is to hit a specific number in tax deferred accounts and reevaluate strategy if incomes still remains high at the time. Does this make sense?
Oh, absolutely it makes sense to take the tax deferral now with that kind of income. For some reason I thought, with deferring $62k per year into tax-deferred accounts, you might be dropping into 22% or 24% tax bracket, but that's clearly not the case here.
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retiredjg
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Re: Exceeded limit on tax deferred contributions?

Post by retiredjg »

I've seen a number of different types of contributions go toward 401a - both employer and employee, voluntary and mandatory. I'm not sure that any kind of 401a is not included in the limit. However, I am sure that UC is keeping up with it and it is their job to be sure you don't go over the limit. Someone could make a mistake, but it is unlikely to happen two years in a row and unlikely not to be noticed. I don't think you have a problem.

In a high tax bracket, deferring taxes does seem prudent. However, having a number of plans available, in addition to a pension (which I suspect you have) in addition to working until a later age (which a lot of academics do) and the possibility that your spouse also has tax-deferred accounts....might be a recipe for setting yourself up for a problem later on. It is possible to have too much in tax-deferred accounts.

Notice that I've mentioned some things that may not apply to you at all. I'm just pointing out a pattern that I have observed and have learned can create a problem later on in life.
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newbie007007
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Re: Exceeded limit on tax deferred contributions?

Post by newbie007007 »

retiredjg wrote: Sun Jul 25, 2021 2:53 pm I've seen a number of different types of contributions go toward 401a - both employer and employee, voluntary and mandatory. I'm not sure that any kind of 401a is not included in the limit. However, I am sure that UC is keeping up with it and it is their job to be sure you don't go over the limit. Someone could make a mistake, but it is unlikely to happen two years in a row and unlikely not to be noticed. I don't think you have a problem.

In a high tax bracket, deferring taxes does seem prudent. However, having a number of plans available, in addition to a pension (which I suspect you have) in addition to working until a later age (which a lot of academics do) and the possibility that your spouse also has tax-deferred accounts....might be a recipe for setting yourself up for a problem later on. It is possible to have too much in tax-deferred accounts.

Notice that I've mentioned some things that may not apply to you at all. I'm just pointing out a pattern that I have observed and have learned can create a problem later on in life.
Yes, 401a can be setup many ways by employer. In my case it was a choice to pick between a 401a or a pension. I declined pension since I was unsure I will work for UC for a long time.

We are certain that if this continues, we will be setting ourself up for higher taxes in retirement but we are unsure how long we will enjoy the ability to defer such a large amount. I have held other jobs where deferring such a large amount was not possible so we are taking advantage of it while we have the opportunity. I am sure that life will throw us a few curve balls and this will not last very long :happy
calwatch
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Re: Exceeded limit on tax deferred contributions?

Post by calwatch »

I tend to agree with deferring more now, assuming you have no need to use the funds otherwise. Given that even while maxing out, it's only 15% of your income, and otherwise those funds would be in a taxable account, there's going to be high taxes either way, coming or going. The benefit of going into a deferred account now is the option to play tax arbitrage when you retire by moving to a state with no income tax, or where mandatory and employer contributions and their growth to a deferred account are not taxable (Hawaii comes to mind).
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