Maxing out 401k contributions at 18%?

[Anonymous]

We are a little bit financial illiterate. I am a SAHM and have an IRA. Husband is a fed (new pension system, so not much) and has 401K plan and an IRA he opened to put in the money from his old 401k (from last 3 jobs before getting into federal service).

He earns about 148k/year and he contributes 15% to 401K. Anyway, while growing this forum, I always see people saying "we" should max out 401k contributions at 18% so I pestered him about (yes, I confess I take advice from this forum ) this and he finally talked to someone about upping his contribution form 15% to 18%.

However, the person who he talked to told him (and printed out a paper about this subject) the maximum he can contribute per year is 18k (per IRS) and the government matches up to 5% of his contribution every pay period (not subjected to the IRS 18k limit). So, anyway, if he contributes 18% of his paycheck, that will surpass the 18k/year allowed and at some point in the year his contributions will stop once it reaches the total limit. The downside of that is that the government ALSO stop the contribution once none is taken out the employee's paycheck, so he could end up missing on his employer's contributions.

So, given those facts, it doesn't seem it makes sense for him to max out at 18%. It seems it would be wiser to lower the monthly contribution to not reach the 18k/year limit before the end of the year and max out on the employer's match program.

Is my understanding correct or is there something I am missing here?

On a side note… can he also contribute to his IRA account?

[Anonymous]

Some people on here describe "maxing out" as a % (like the % that their employer matches up to) and some see "maxing out" as the max dollar limit. The limit changes periodically. Right now it is $18,000.

[Anonymous]

Anonymous wrote:Some people on here describe "maxing out" as a % (like the % that their employer matches up to) and some see "maxing out" as the max dollar limit. The limit changes periodically. Right now it is $18,000.

Does that change yearly or more often?

[Anonymous]

"Maxing out" means hitting the annual limit. Divide the 18K by the number of pay periods in a year, and have that fixed amount taken out from each check rather than a percentage.

I don't know about the feds, but in the private sector, you can change your contribution at any time. So he can figure out how many paychecks left in the year, how far under 18K he is right now, and do that math. That will ensure equal deductions every paycheck and getting the whole match. (BTW that's a weird way to do the match, but like I said, I'm not a fed.)

If you need to be doing more than that, keep doing your IRA, and he can do one too. And if you can afford it, do Roth.

[Anonymous]

Anonymous wrote:We are a little bit financial illiterate. I am a SAHM and have an IRA. Husband is a fed (new pension system, so not much) and has 401K plan and an IRA he opened to put in the money from his old 401k (from last 3 jobs before getting into federal service).

He earns about 148k/year and he contributes 15% to 401K. Anyway, while growing this forum, I always see people saying "we" should max out 401k contributions at 18% so I pestered him about (yes, I confess I take advice from this forum ) this and he finally talked to someone about upping his contribution form 15% to 18%.

However, the person who he talked to told him (and printed out a paper about this subject) the maximum he can contribute per year is 18k (per IRS) and the government matches up to 5% of his contribution every pay period (not subjected to the IRS 18k limit). So, anyway, if he contributes 18% of his paycheck, that will surpass the 18k/year allowed and at some point in the year his contributions will stop once it reaches the total limit. The downside of that is that the government ALSO stop the contribution once none is taken out the employee's paycheck, so he could end up missing on his employer's contributions.

So, given those facts, it doesn't seem it makes sense for him to max out at 18%. It seems it would be wiser to lower the monthly contribution to not reach the 18k/year limit before the end of the year and max out on the employer's match program.

Is my understanding correct or is there something I am missing here?

On a side note… can he also contribute to his IRA account?

Ignore other people talking about percentage. As you discovered, different people make different salaries and their 18% (at 100K salary) may equal your husbands 15% - though quick match tells me that 15% of 148K is $22K - he may want to lower his % further in order to not miss out on company match for the paychecks where he's already maxed his 18k (for 2015) (looks like it would be about 12% or 12.5%)

He should be able to contribute to his IRA if that's your only income, as a married couple - a traditional IRA should be no problem, but ROTH IRAs have income phaseout, though I'm pretty sure a married couple at 148k is under the income threshold, you're not far from it so keep an eye on (FWIW - it's based on AGI, Adjusted Gross Income) not simply compensation.

[Anonymous]

The limit is set each year. Sometimes it changes, sometimes it doesn't. But it would never change more than once a year.

[Anonymous]

Limit changes yearly.

Some employers will do a true up - I.e if I contribute $18,000 in January, then don't contribute anything else all year, the employer will match what they would have had I spread it out at the end of the year.

Not all employers do that or offer that. In general my rule is to max out with the dec 1st paycheck. My firm will true up the remaining 30 days and in the interim the extra $$ is basically an automatic fund for Christmas gifts.

[Anonymous]

Anonymous wrote:Limit changes yearly.

Some employers will do a true up - I.e if I contribute $18,000 in January, then don't contribute anything else all year, the employer will match what they would have had I spread it out at the end of the year.

Not all employers do that or offer that. In general my rule is to max out with the dec 1st paycheck. My firm will true up the remaining 30 days and in the interim the extra $$ is basically an automatic fund for Christmas gifts.

This provision needs to be written into the plan document. It's not just something they can do at the end of the year, if it's not an already present provision.

[Anonymous]

The 401k contribution limit changes annually. Your DH can do the math to find out what percent he needs to set in order to evenly allocate the 18K if that is what he wants to do. The percent can also be changed throughout the year in case an emergency comes up and you don't want to contribute for a particular month.

[Anonymous]

Your husband should do 12% of his salary per year. That will get him close to maxing out at $18,000. Not sure where 18% comes from.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Limit changes yearly.

Some employers will do a true up - I.e if I contribute $18,000 in January, then don't contribute anything else all year, the employer will match what they would have had I spread it out at the end of the year.

Not all employers do that or offer that. In general my rule is to max out with the dec 1st paycheck. My firm will true up the remaining 30 days and in the interim the extra $$ is basically an automatic fund for Christmas gifts.

This provision needs to be written into the plan document. It's not just something they can do at the end of the year, if it's not an already present provision.

Hence why I said not all employers offer that.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Limit changes yearly.

Some employers will do a true up - I.e if I contribute $18,000 in January, then don't contribute anything else all year, the employer will match what they would have had I spread it out at the end of the year.

Not all employers do that or offer that. In general my rule is to max out with the dec 1st paycheck. My firm will true up the remaining 30 days and in the interim the extra $$ is basically an automatic fund for Christmas gifts.

This provision needs to be written into the plan document. It's not just something they can do at the end of the year, if it's not an already present provision.

Hence why I said not all employers offer that.

Understood, but simply saying 'not all employers do that', to people who are self-described financially illiterate doesn't necessarily read they can't per the plans governing guidelines without updating them, it may read my company doesn't do that NOW but if I pester them enough, maybe I can change it.

[Anonymous]

Anonymous wrote:Your husband should do 12% of his salary per year. That will get him close to maxing out at $18,000. Not sure where 18% comes from.

Absolutely wrong.

I contribute the max but spread the $18k over the 26 pay periods which Is $692 per pay period. Never use % because you don't want to lose out on the govt contributions! it's stupid that the government won't even prevent hitting the max early.

[Anonymous]

PP, what happens when you max the $18K in PP20 let's say?

[Anonymous]

Depending on when he is paid, he may have 27 pay periods in 2015. So divide 18000 by 27, not 26 as usual.