FREE NEWSLETTER
MY WIFE AND I ARE super-savers. For us, that means we save as much as permitted each year in the retirement plans available to us. Once we’ve done that, we invest in our regular taxable accounts, where there’s no limit on the amount we can contribute.
We’re under age 50. That meant that, in 2022, the maximum contribution was $6,000 each to our IRAs and $20,500 each to our 401(k)s. Because the contribution limits increase with inflation, the 2023 limits are $6,500 for IRAs and $22,500 for 401(k)s.
My wife is considered a highly compensated employee—I know, a nice problem to have—so her company reduces the amount she can contribute to her 401(k). That makes me even more motivated to contribute all that I can. I also have a high-deductible health insurance plan with an accompanying health savings account, which allowed me to sock away $3,650 in 2022, then the maximum allowed. This year’s max is $3,850.
In recent years, it’s become fashionable to bash 401(k)s for reasons I don’t entirely understand. While I enjoy contributing to all my accounts, I view the 401(k) as the primary vehicle for ordinary Americans to build wealth. I still believe it’s possible for regular people to get rich in this country, and to do so they should contribute to their retirement plans—even if they don’t or can’t save the maximum allowed.
Which, surprisingly, recently happened to me.
In March 2022, I was enjoying both my job and my journey toward maxing out my firm’s 401(k). Quite unexpectedly, I received a job offer from another firm, one that was too good to refuse. My new employer also has a 401(k). But the firm’s policy is that new employees couldn’t begin contributing until they worked there for six months.
Because I started the new job on April 11, that would mean that I, Mr. Super Saver, would have to cool my jets until October, when I could then resume my 401(k) contributions and max out that year’s contribution limit.
No problem, I thought. I dutifully calculated the difference between the maximum contribution for 2022 and the amount I had contributed at my previous employer. I then plotted the exact percentage of my income I’d need to have deducted each pay period to hit the maximum for the year with my new 401(k).
When the pay period following Oct. 11 arrived, I eagerly checked my paystub for confirmation of my 401(k) contribution. Nothing was deducted. Obviously, there was a mistake in the processing, either with my firm or its 401(k) provider. I immediately contacted human resources.
HR informed me that there was no mistake. The firm’s policy, it turns out, states that a new employee can begin making 401(k) contributions on the first day of the next quarter that follows his or her six-month anniversary. Because I began work on April 11, that date was Jan. 1, 2023. In other words, I was 11 days too late to contribute anything more for 2022.
Acting as my own counsel, I objected to the rule. I begged that an exception be made so that I could super-save. The objection was overruled, and no exception was granted for little old me.
In addition to fine print like this, there’s another important point for employees to understand: The individual annual 401(k) contribution limit applies, no matter how many jobs or 401(k) plans they may have. If you’re under 50, you may not under any circumstances contribute more than $22,500 to all of your 401(k)s in 2023. Workers 50 or older can contribute another $7,500 in catch-up contributions, or $30,000 maximum from all jobs they have.
Because I only had one job at a time in 2022—which was enough for me, thank you very much—that meant I was effectively unable to contribute anything further to my 401(k), beyond what I’d already saved in my previous employer’s plan.
Although disappointed, I made extra contributions to taxable brokerage accounts and also saved some cash. As it happens, that extra cash came in handy—when our home was damaged by a tornado. But that’s another story.
Licensed in both Ohio and Kentucky, Ben Rodriguez practices real estate law in Cincinnati, where he lives with his wife and daughters. Since 2009, Ben’s made a hobby out of personal finance by reading books and articles on the subject, and also listening to podcasts. Check out his earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
There are many potential pitfalls… being an HCE sucks. If you contribute too much too soon, you may lose out on matching $$$.
There is also another trap due to the language in the plan/adoption agreement of some 401(k) plans where the company match is based on the employee contribution on a payroll by payroll basis. The effect can be if the employee elective contribution is not for every payroll period for the full plan year (typically a calendar year) then the employer dollar match may be less on a partial year than on a full year even if the employee elective contribution is the maximum permitted.
A word to the wise is to read your summary plan description (SPD) upon hire and every time, think annually, there is a material modification to the plan. If in doubt about plan provisions ask your HR and/or read the plan documents. Getting your hands on the actual plan documents and the related adoption agreement is usually a difficult or impossible task. If you do not have a SPD ask your HR for a copy, the employer is required to provide participants a copy.
Some information about your plan may also be available after the fact by reading the public disclosure of your plan’s 5500 which should be available online by October 15 of the year following the close of the plan year and if your plan is considered a large plan then a copy of the audited financial statement of the plan is attached. You can find this at https://www.efast.dol.gov/portal/app/login?execution=e1s1
The bashing of 401k plans is in the context of comparing them with defined benefit pensions- which at this point only about 15% of private sector workers have. The value in a pension plan is longevity with an employer, only certain industries ever had that where someone stays for forty plus years, it’s even less today, but I can tell you having a pension based on nearly fifty years of service is the definition of retirement financial security.
The 401k, as you know, shifts both responsible and risk to the worker. The problem is many – most – are not equipped to handle that and thus retirement income is questionable for many.
The rules you cited are designed to limit tax revenue loss, discrimination in favor of highly compensated workers and to protect the employer when matches are immediately vested or from admin for a worker that doesn’t stick around.
It’s a bit ironic that older workers can contribute more in catch-up contributions when we should be making it easier for younger workers to accumulate as much as possible as early as possible.
Given your benefit expertise, I was wondering if you know how the average employer contribution to a 401 compares to the average employer contribution to a defined benefit plan.
The typical funding level for a decent pension plan was about 8% of payroll. 401ks are typically a bargain for employers.
That and the administrative burden of maintaining a defined benefit plan is why they have become the proverbial Dodo bird of retirement planning.
Sometimes things work out that way. If you had been able to stash in the 401k you wouldn’t have been able to easily access your tornado money!
I am 57 years old, and I will contribute $73,500.00 to my retirement account this year ($7,500.00 of which are matching dollars). I am able to do this because the company I work for (Dell) has a well thought out retirement plan, which includes the ability to contribute on an after tax basis. The plan puts a cherry on top by allowing in-plan conversion of those after tax dollars (immediately) to Roth (the fabled back-door option). The limits you mentioned can be eclipsed – if your company would pursue it.
That’s awesome, Tom. I’m yet to work for a company that allowed after tax contributions so I’ve never gotten to do the vaunted Mega Back Door Roth. Jealous.
What you mention is a valuable option. While most workers are not going to be able to reach such saving levels, the after tax and Roth option are great and don’t cost the employer. After tax contributions counts toward the future RMD, but not taxable. https://www.bankrate.com/retirement/after-tax-401k/#:~:text=Employee%20contributions%20are%20limited%20to,including%20any%20employer%20matching%20funds.
Which company manages your qualified work plan?
Fidelity.