How many in pre-retirement make catch-up contributions to 401K

[Astro14]

My issue with pouring lots of extra earnings into the stock market, especially a tax-deferred account such as an IRA/401/403/etc., is that it's tied up in the stock market, in a 401k/etc., you're beholden to your employer's HR department (i.e.: low IQ people) selection of 401k salesmen who have selected "great" funds for you to invest your hard-earned money.

Then comes the time when mandatory distribution might kick in and you don't necessarily need/want it at that point.

I know my groanings don't apply to all or possibly many, but I'm at a point where I will continue to contribute ~10% to an employer-sponsored plan but due to what seems like continuous volatility, I am looking for other avenues of investment outside the stock market.

So my thoughts are don't slam people for not throwing as much as they can into an employer-sponsored plan. Most of them suck with regard to choices of funds.

Easy fix - max out the contribution, then roll it over to a traditional IRA.

Fund selection problem solved.

 

[John105]

For 2024 the 401(k)limit is $23,000 for employee contributions and $69,000 for the combined employee and employer contributions. Some 401(k) plans allow before and after taxes contributions, so reaching the 69K ceiling is possible. Maybe that's the reason why only 10% of eligible employees are taking advantage of $7500 catch up contribution. They are already saving a decent amount.

How does the $69k figure work. Say employee does $30,500. Even if employer matched $1:$1 on 100%….

 

[Astro14]

HSAs are contingent on having an HDHP (High Deductible Health Plan). Part of having a HDHP is having a minimum deductible which is set higher than a traditional plan, basically along with the benefit of a company contribution to an HSA, being able to put money pre-tax in your HSA, and presumably a lower monthly premium, you sign up for paying the first $X out of your own pocket (at the insurance negotiated rate). For 2024, that's $1,600 for individual deductible and $3200 for the family deductible. Out of pocket max is higher too, although a plan does not have to go to the max out of pocket max ($8,050 for individual and $16,100 for a family in 2024).

The benefit/tradeoff, is this gives someone the opportunity to contribute to an HSA pre-tax. Money spent from the HSA for qualified medical expense are not subject to tax, and can be spent without penalty. You can invest an HSA, and growth is not taxed if it is spent on a qualified expense. In retirement, money can also be withdrawn for non-qualified expenses. In that case they would be subject to income tax at the prevailing rate, still in retirement, tax benefit continues for qualifing expenses.

Not certain that is true. My health plan has very modest deductibles, and I have an HSA, as well as an RHA.

 

[ArrestMeRedZ]

... 401K was a refuge. Plus didn't want to pay taxes on Roth conversion. I am going to pay the piper at 72+. We'll see.

If you want to see an eye opener, plug your numbers into the AARP Required Minimum Distribution calculator using a 10% return (pretty much S&P average returns). If you think the piper is being paid at 73, look at what he gets 20 years later at 93, taking only RMDs. If you don't make it that far, the heirs pay the piper squared.

I'm going to use very rough numbers. Using a combined husband and wife 401k/IRA balance of $500k at retirement at 66 years old, your balance at the RMD age of 73 will have grown in 7 years to $1M. First year RMD is about $40k. Taking out only RMDs, Year 20 your RMD is $220k, and your account balance is over $2.2M.

If you are starting at $1M total at retirement, double those numbers. $1M each husband and wife, multiply by 4.

RMDs seem to be designed to lull you into a false sense of security that you are saving on taxes. I am a strong believer in an alternate withdrawal strategy that uses additional withdrawals or Roth rollovers to prevent gains from growing the 401k/IRA account after retiring. The RMD will grow because of the multiplier, but that growth will be manageable.

Best of luck in retirement all, and as JeffK would say, having to pay a lot of taxes isn't the worst thing. It just means you are making a lot of money.

 

[Billy_D]

Say employee does $30,5

How does the $69k figure work. Say employee does $30,500. Even if employer matched $1:$1 on 100%….

Some plans allow before and after tax contributions.

Once you max out your 23K Yearly contribution. You start contributing with after tax dollars until you reach the IRS 69K Combined employee/employer limit for 2024. The employer match is limited to whatever the company wants. Every company will be different. Boeing for example will match your contribution $ for $ on the first 10 per cent of base and incentive pay. If you are 50 and over your can actually save $76500.

 

[SC Maintenance]

If you want to see an eye opener, plug your numbers into the AARP Required Minimum Distribution calculator using a 10% return (pretty much S&P average returns). If you think the piper is being paid at 73, look at what he gets 20 years later at 93, taking only RMDs. If you don't make it that far, the heirs pay the piper squared.

I'm going to use very rough numbers. Using a combined husband and wife 401k/IRA balance of $500k at retirement at 66 years old, your balance at the RMD age of 73 will have grown in 7 years to $1M. First year RMD is about $40k. Taking out only RMDs, Year 20 your RMD is $220k, and your account balance is over $2.2M.

If you are starting at $1M total at retirement, double those numbers. $1M each husband and wife, multiply by 4.

RMDs seem to be designed to lull you into a false sense of security that you are saving on taxes. I am a strong believer in an alternate withdrawal strategy that uses additional withdrawals or Roth rollovers to prevent gains from growing the 401k/IRA account after retiring. The RMD will grow because of the multiplier, but that growth will be manageable.

Best of luck in retirement all, and as JeffK would say, having to pay a lot of taxes isn't the worst thing. It just means you are making a lot of money.

Depends on who your leaving the money to, and their tax situation. With that kind of money your more than likely leaving a fair bit. You could skip a generation, leave it to your grandkids, who might have a low tax burden at the time of inheritance. I can't remember if they have 5 or 10 years to take it.

Another scenario - lets say your young and maxing out your 401K and you die early. Your spouse may not have the tax burden you did together. Mine would not. I would rather she have the tax sheltered amount, she could take it out over the specified time and probably be under the tax rate we pay now.

Its very situationally dependent. I know everyone hates taxes, me especially - but I think Roth's are pushed way too hard to a lot of people.

 

[Pablo]

If you want to see an eye opener, plug your numbers into the AARP Required Minimum Distribution calculator using a 10% return (pretty much S&P average returns). If you think the piper is being paid at 73, look at what he gets 20 years later at 93, taking only RMDs. If you don't make it that far, the heirs pay the piper squared.

I'm going to use very rough numbers. Using a combined husband and wife 401k/IRA balance of $500k at retirement at 66 years old, your balance at the RMD age of 73 will have grown in 7 years to $1M. First year RMD is about $40k. Taking out only RMDs, Year 20 your RMD is $220k, and your account balance is over $2.2M.

If you are starting at $1M total at retirement, double those numbers. $1M each husband and wife, multiply by 4.

RMDs seem to be designed to lull you into a false sense of security that you are saving on taxes. I am a strong believer in an alternate withdrawal strategy that uses additional withdrawals or Roth rollovers to prevent gains from growing the 401k/IRA account after retiring. The RMD will grow because of the multiplier, but that growth will be manageable.

Best of luck in retirement all, and as JeffK would say, having to pay a lot of taxes isn't the worst thing. It just means you are making a lot of money.

Smart.

I kinda sorta know it's coming. Because well all told yeah, at 65 we have over $3M in IRAs. I don't want to think about it right now......ahahahhaha

But I am doing a LITTLE about it. Moving into stable, semi-stable and even some funds (bond) that I really am not worried if rates tick up and they lose value. You notice I'm not jumping on the Investing Blog thread crowing about 20% gains!!

I've always known taxes seem to be attached to my keester like stink on rice no matter which way I turn. I'm living with some abuse in muni funds right now.

One thing if kids inherit the IRA's they have to spread it 10 years, used to be actuarial table estimated lifespan.

 

[zzyzzx]

There are people not making catch-up contributions???

 

[99Saturn]

Not certain that is true. My health plan has very modest deductibles, and I have an HSA, as well as an RHA.

Not saying this is the be all and end all but my understanding:

IRS Courseware - Link & Learn Taxes

Link & Learn Taxes, linking volunteers to quality e-learning

apps.irs.gov

Health Savings Account (HSA) Rules and Limits

Do you qualify? What does it cover? See if it makes sense to sign up for a High-Deductible Health Plan with a Health Savings Account.

www.investopedia.com

$1,600 for an individual may still be considered modest . I was not really aware of this when my company kicked off a HDHP but I know someone in our policy/PR department that helped think through when my company started offering a HDHP and where we set our out of pockets (my company sets them to the mandated minimum as I understand it). Could definitely be some caveats I am not aware of.

Edit: when I was referring to having a HSA I meant actively being able to contribute to, not holding a HSA, in case that is the confusion.

 

[99Saturn]

My bro and my buddy both have HSAs and they told me as a matter of fact the balance is in the mid 20's. I totally get the idea--they can quit or get fired and it's theirs to keep.

BUT, my strong belief is that the employers forced them into that position. And the balances are high because they didn't need to use the health care.

I happen to know both personalities--when someone gets sick, there is a conscious decision on whether to spend $130 or not. Compounding other decisions are very high deductibles. This thinking also applies to children, who really cannot make the decsion for themselves. I went to CHoP last summer because I was afraid my son had cauliflower ear. It was not and the MD was surprised we came in. After I told her why, she then said she understood (ear could be deformed, it was totally black/blue). If I had a HSA that would have been likely $1300, not $100.

All of this is the lesser of evils imho. I've always had the best health plan and paid dearly, and rarely used. So in retrospect yes the HSA would have worked. But now is not the time for me to start that....

People have to for sure know what they are getting themselves into for an HDHP, and assuming they have a choice compare the numbers of what they are paying to premiums, out of pocket, etc.

I'll share my situation - family coverage (4 people). Premium difference between the HDHP and a co-insurance is a little over $3,300
HDHP family deductible is $3,200 (you have to hit the family deductible before anything gets covered, unlike the coinsurance where you hit the individual deductible) versus $600/$1,200 individual/family deductible on the co-insurance. Out of pocket max $3600/$7200 on HDHP, $2500/$3800 on coinsurance. There are situations where the $3,300 premium spread probably makes sense to pay, and obviously situations where the HDHP will work out, all sort of a gamble and risk reward breakdown. My wife tends to go to the doctor a lot, doesn't hit the out of pocket max (though she did when each child was born) and I tend to just go for my annual. Kids have been lucky to not get sick. I am assuming we are going to get caught one year where everyone needs to go to the doctor but no one hits their max deductible, and maybe everyone contributes pretty evenly to the deductible.

Bottom line people should run the numbers. I don't want to sound preachy about going to the doctor but I do think the downfall is HDHPs can incentivize people to skip doctor appoints, for me personally I am looking at it as a funnel for limiting tax on investment (triple taxed advantaged account and I still pay medical expenses out of pocket rather than out of my HSA, because I can). I'd have second thoughts if it was stopping my family from going to the doctor. I also recognize my plan is somewhat unique since my company has intentionally set everything to the minimum requirements, some HDHPs are painful in regards to out of pocket maxes and deductibles.

 

[Donald]

https://www.investopedia.com/terms/h/highly-compensated-employee.asp

Exactly how do you know if you are a HCE?

HR will tell you and limit your max 401K to 7%.

When I worked for large financial corporations never encountered a HCE situation. But I am now in hospitality with people cleaning hotel rooms and people in IT earning a good salary. That's where the IRS examines and determines not enough with a low salary are in 401K and imposes HCE.

 

[Donald]

For 2024 the 401(k)limit is $23,000 for employee contributions and $69,000 for the combined employee and employer contributions. Some 401(k) plans allow before and after taxes contributions, so reaching the 69K ceiling is possible. Maybe that's the reason why only 10% of eligible employees are taking advantage of $7500 catch up contribution. They are already saving a decent amount.

I have maxed everything including ESPP.. Basically I don't need the salary my job pays. I could save it all. But let's face it if you are 70 and still need your salary then your retirement is in question.

 

[centertex]

There are changes coming for 401K plans because of recent federal tax law changes. One involves the catch-up contribution allowed for employees in pre-retirement. But the statistics are that less than 10% of eligible employees contribute anything to the catch-up portion of a 401K.

I maxed everything I could in my 401K.

Ii n 2023 I believe I will be considered an HCE and can only contribute 7% to the regular portion of my 401K.

Just remember you're trading a tax rate certain for a future tax rate that is uncertain. I never accept uncertainty when I don't have to. Everything is uncertain, of course, but the government has complete power over you and the tax rate you pay but once the cash is in your hand, they have much less power over your tax rate. Am I discounting the benefit of professional money managers growing your money for you? Yes I am, because that's a greater risk than the government.

 

[John105]

HR will tell you and limit your max 401K to 7%.

When I worked for large financial corporations never encountered a HCE situation. But I am now in hospitality with people cleaning hotel rooms and people in IT earning a good salary. That's where the IRS examines and determines not enough with a low salary are in 401K and imposes HCE.

I thought it was the SS cap which is $168,600, but apparently not. I learned something today

 

[zzyzzx]

Just remember you're trading a tax rate certain for a future tax rate that is uncertain.

I plan on retiring in a state with no state income taxes

 

[Dave Hess]

Contribution limits. Sorry.

Contribution limits are too low. They need to 2X everything.

 

[99Saturn]

Unfortunately it's a shame that there are any contribution to begin with

Contribution limits are too low. They need to 2X everything.

Why?

 

[supton]

There are people not making catch-up contributions???

My plan is not to do that. I mean, you can start doing at age 50, so that can be 15+ years of growth, don't get me wrong. But ideally I would not have to. I could--if I wanted to--but ideally, I wouldn't have to.

I don't think in my early 50's I'll be able to. Luckily I have a few left before crossing that line. Maybe I'll get lucky, get that fat pay raise, and be able to do it all--pay extra on my mortgage and shove yet more into my 401k. I can always hope.

I plan on retiring in a state with no state income taxes

Just watch for the total bill. NH doesn't have income tax. But check out the property tax! and then the high cost of entry. I'm sure other states are better on property tax, but in the end, it's total money outflow.

 

[BMWTurboDzl]

Why?

I meant any contribution LIMITS. Omission on my part

 

[BMWTurboDzl]

Contribution limits are too low. They need to 2X everything.

Or get rid of them entirely.