backontrack
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Post by backontrack on Feb 16, 2011 10:51:42 GMT -5
A couple of years I haven’t watched my 401k contributions closely at the end of the year and I have ended up going over the allowed ceiling, so those funds have been invested after tax. Should I pull that money out or leave it? I am assuming the interest will be taxed. Are there any kind of penalties since it is technically a 401k?
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mwcpa
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Post by mwcpa on Feb 16, 2011 11:52:43 GMT -5
 ? you contributed more than $16,500....why didn't your employer catch this... you need to have the excess and any earnings attributable to that withdrawn asap or you will face an excise tax each year the overage exists... |
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phil5185
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Post by phil5185 on Feb 16, 2011 12:48:31 GMT -5
and I have ended up going over the allowed ceiling Unusual - most Payroll Depts cut it off at $16,500 (or $21,500 if you are over 50) - my employer always cut it off automatically. Check with HR, maybe you can recharacterize the over-payments. |
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backontrack
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Post by backontrack on Feb 16, 2011 14:01:48 GMT -5
Hm, I didn't realize that I was in such an unusual position. I'll have to see it HR can advise. I select a percentage to deposit in the 401k, and if it goes over the yearly limit they still take it out, just after taxes. There's only about $1k in there from the last few years.
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schildi
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Post by schildi on Feb 16, 2011 16:03:31 GMT -5
and I have ended up going over the allowed ceiling Unusual - most Payroll Depts cut it off at $16,500 (or $21,500 if you are over 50) - my employer always cut it off automatically. Check with HR, maybe you can recharacterize the over-payments. Yes, that's exactly what my employer is doing: the contributions stop at the limit. That's how it should be, and it's easy to implement for the employer, but would be a pain for the employee to watch. Why would anybody want to contribute after tax to a 401(k)? Yeah, you need to talk to your payroll dept. |
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spartan7886
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Post by spartan7886 on Feb 16, 2011 16:45:35 GMT -5
mwcpa, if the excess earnings were deposited after-tax, she still needs to withdraw them? I know my employer offers after-tax 401k contributions as a matter of course. They automatically stop regular contributions after $16,500 and revert to your after-tax contribution level.
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phil5185
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Post by phil5185 on Feb 16, 2011 18:19:23 GMT -5
They automatically stop regular contributions after $16,500 and revert to your after-tax contribution level. But you probably don't want to let this happen. A nondeductable contribution means that you pay full income tax on the money now - and then pay full income tax on the earnings when you retire. That is a terrible investment - it would be better to invest the money in any other fund and then pay only capital gains tax when your retire. |
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mwcpa
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Post by mwcpa on Feb 17, 2011 5:56:16 GMT -5
"mwcpa, if the excess earnings were deposited after-tax, she still needs to withdraw them? I know my employer offers after-tax 401k contributions as a matter of course. They automatically stop regular contributions after $16,500 and revert to your after-tax contribution level."
that situation seems a little different than what the original poster stated, but if there are "after tax" contributions I think Phil (above) summed up the problem with such a move...
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spartan7886
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Post by spartan7886 on Feb 17, 2011 7:59:52 GMT -5
I never said it was a good idea, I just thought it odd that she would have to pay an excise tax when she said
"I have ended up going over the allowed ceiling, so those funds have been invested after tax"
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backontrack
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Post by backontrack on Feb 17, 2011 11:27:17 GMT -5
Yes, as Spartan said, these are after-tax contributions. I figure if I pull them out I get taxed on any interest, but that should be it, right?
Many years ago I worked with a guy who put all of his money into the 401k after-tax so that he could pull it out whenever he wanted without penalties. Yeah, he didn’t really understand the benefit of having a 401k or saving for retirement.
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mwcpa
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Post by mwcpa on Feb 17, 2011 13:49:52 GMT -5
spartan, you are correct.... if the moneys were contributed in accordance with the the provisions of a qualified plan that allows "after tax" contributions then no excise tax will apply... i must have mis understood the original poster....
when the money though comes from the after tax funds the appreciation (interest, dividends, capital gains) associated with those funds are "ordinary income" no benefit for the 15% special tax rate... I guess that is a penalty in itself.....
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