FAQ about 401k plans

by Chris Butterworth on June 17, 2012

The following are a running list of questions that I often get from readers and my answers:

How old do I have to be to withdraw from my 401k?

You work hard all of your life and earnestly contribute to your 401k. Then comes the time that you are eligible to withdraw the money. The simple answer is 59 1/2 under most conditions.

Can you deduct 401k contributions on your taxes?

Yes, you can deduct the contributions you make to a traditional 401k (this is the plan that most taxpayers have) up to certain limits.  Generally speaking, your employer will deduct your 401k contributions on a pre-tax basis, which means that you have not paid federal income taxes on your contributions to begin with.  You do pay payroll taxes like Social Security and Medicare on your contributions, but your contributions are excluded from your income for federal income tax purposes provided the contributions don’t exceed the contribution limits.  So it’s a bit of a misnomer to say that you can “deduct your contributions” because in most cases, there’s nothing to deduct.  When you get your year-end W-2 from your employer, they’ve been deducted for you already!

Can I contribute more than $17,000 to my 401(k) in 2012?

Yes, you may contribute more than $17,000 to your 401(k) under a variety of circumstances. First, if you are over 50, you can make catch-up contributions and contribute an extra $5,500 to your plan on a pre-tax basis. You can also contribute more than the pre-tax limit to your 401(k) in many plans but contributing that excess money doesn’t confer any tax advantages.  In essence, excess contributions are taxed twice. The funds are taxable now and also taxable when you take the money out of your plan — however the money does grow tax-free until it’s distributed.  However, despite this advantage, you’re likely better off contributing the maximum to your Roth IRA or traditional IRA first, because they confer additional tax advantages.

What are the 401k contributions limits if I have more than 1 employer?

The same as everybody else buddy!   You must be a little careful because your employers and the IRS aren’t mind readers.  You can only deduct the 401k contribution limits each year and no more.  Just make sure you’re not contributing more than the max ($17,000 if you’re 50 or under, $22,500 if you’re 50 or over) and you’ll be good. Or if for some reason you got yourself into a sticky situation and contributed more than that, just make sure you’re not claiming more than you’re allowed on your taxes.  Surf on my hardworking friend!

However, there is a limit on annual additions (50k in 2012) that is the sum of your and your employers contributions for each 401k plan that you take part in.  there is potentially an advantage in having more than one employer because in theory, you could exceed 50k in total contributions.  As you might guess, this is very unlikely to happen but is theoretically possible.  Take a look at this example:

Employer 1 Employer 2 Total
Your Contributions $8,500 $5,000 $13,500
Employer Contributions 41,500 40,000 81,500
Total Contributions $50,000 $45,000 $95,000

Do “401k limits” include only my contributions or do they also include employer contributions?

The elective deferral limits, also referred to as 401k limits only include your contributions to your 401k plan.  They do not include your employer’s contributions or any matching contributions.   So for instance, in 2012 you can personally contribute $17,000 (or $22,500 if you’re 50 or older) to your 401k plan and your employer could contribute above that amount. 

 

 

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