401k Question - Over Contributions

[LSUFan]

If I put in more than 17%/yr, what happens?

Do they start taxing it before it is deposited into the 401?

Can I draw that out tax free when I retire?

How does it work?

Good practice, or no?

[TheJoeyBucketz]

You have until April to withdraw the excess, plus any earnings the excess has generated. You will be taxed on the excess + earnings.

If you refuse to withdraw it that amount will be 1)added to your taxable income for the year and 2)you will pay taxes on it again when you withdraw it during retirement.

You can personally help pay down our nations debt, one over-contribution at a time.

[McKdaddy]

Most 401k plans of my clients have a spillover provision, so that those excess contributions go in as after-tax, therefore no income reduction benefits on the excess contribution. You still receive tax-deferred growth on the money, but pay taxes on the earning when withdrawn. The after-tax contributions can be withdrawn "tax-free" in these particular plans, but it is simply a return of principal. So you are putting in money without a tax benefit today and no tax benefit at retirement.

No, I don't recommend clients do this.

[LSUFan]

Thank you bofe

[hog.goblin]

17% isn't too much unless it's a top heavy plan.  I have an employee who puts 100% of her wages in.  But she's capped at $18,000.

[LSUFan]

Any other pre-tax plans I can contribute to?

I already put max amount in my HSA

[hog.goblin]

If single and under $61K in AGI you can still do a traditional IRA.  If married your AGI needs to be less than $98K.

Otherwise consider a ROTH.  Not pre-tax but tax-free income forever.

If you also have some self-employment income you can look at adding some other options.

After exhausting all that you are left with stock investing vs annuities and insurance for tax efficiency.

[LSUFan]

Head of Household and well over 61k or 98k.

I'm guessing a Roth is my next step, or more stocks.

Any early withdrawal penalties on a Roth?

[Arkansasbeaux]

Early withdrawal penalties still apply prior to 59 1/2. For the gains in a Roth to be completely tax free, you must be over 59 1/2 and have had the Roth for a minimum of 5 years. However, you can start withdrawals prior to 59 1/2 to a certain degree without taxes or penalties. The contributions made to a Roth are after tax. Therefore, regardless of when you withdraw them, they will be tax free and penalty free. The IRS has a pecking order for withdrawals. Contributions are always taken out prior to gains. However, it is up to the individual to keep up with their contribution basis in the Roth and file the appropriate forms as the 1099-r will still show a code 2 (early withdrawal). I can't remember the form number off the top of my head but your CPA should be able to take care of it rather easily.

[LSUFan]

Early withdrawal penalties still apply prior to 59 1/2. For the gains in a Roth to be completely tax free, you must be over 59 1/2 and have had the Roth for a minimum of 5 years. However, you can start withdrawals prior to 59 1/2 to a certain degree without taxes or penalties. The contributions made to a Roth are after tax. Therefore, regardless of when you withdraw them, they will be tax free and penalty free. The IRS has a pecking order for withdrawals. Contributions are always taken out prior to gains. However, it is up to the individual to keep up with their contribution basis in the Roth and file the appropriate forms as the 1099-r will still show a code 2 (early withdrawal). I can't remember the form number off the top of my head but your CPA should be able to take care of it rather easily.

Thank You!

[hog.goblin]

Form 8606