We’re frequently asked questions about this, that, or the other thing involving retirement plans and taxes. Not only do we think our clients can use an FAQ resource, we’ll be using it too, to help answer questions we get. (There’s only so much information we can store in our heads without occasionally double-checking our answers!) Is the question you need an answer to not asked below? Go to ASK AN EXPERT, and ask your question. We’ll send you an email with our answer—and if appropriate, edit our FAQs to include your question for the next person seeking that answer.
No. If you employer does offer a 401(k), consider yourself one of the lucky ones: More than half of all workers in the United States do not access to a workplace retirement plan! Your employer undertakes significant cost, operational aggravation, and fiduciary liability to make a 401(k) available. Take advantage of it!
401(k) contribution limits are not “per plan” but “per calendar year”. The amount you contributed into another plan in the current year will reduce the amount you can contribute to your new 401(k) plan.
When participating in two 401(k) plans in the same calendar year, neither your former employer nor your current employer must monitor how much you contribute in total for the year: it’s your responsibility to track this. If you contribute too much, there are potential adverse tax implications to you when you file your tax return for that year.
No, contributions to a 401(k) must be deducted from your paycheck.
PLANNING TIP: It might be possible to contribute 100% of your paycheck into the 401(k) late in the calendar year and use your savings to make up for the lost take-home pay. Ask your payroll department about the frequency with which you can change the amount coming out of your paycheck.
No. While you can make both Roth and “traditional” 401(k) contributions, the total contributions into your 401(k) cannot exceed the current year’s dollar limitations (or a lesser amount if your compensation is less than the dollar limitations).
In calendar year 2019, $19,000, but no more than 100% of your paycheck (less FICA taxes). Some plans, for IRS considerations, may impose lower limits for some or all plan participants. (In calendar year 2020, the dollar limit is $19,500.)
If in calendar year 2019 you are age 50 or older, you can also make a catch-up contribution of $6,000 in addition to the $19,000. (In 2020, the catch-up increases to $6,500.)
These dollar limits can increase year-by-year given inflation and IRS rules.
Certain employees designated by the IRS as “highly compensated” may not be able to defer as much as they might otherwise prefer. If you are impacted by these IRS rules, your HR department will undoubtedly inform you of your deferral limitations.
A “safe harbor” 401(k) plan allows an employer to skip certain testing requirements that might otherwise constrain certain employees from being able to defer the maximum dollar amounts. To secure this relief, the plan must either:
Match deferrals with a formula as favorable as dollar-for-dollar on the first 3% of compensation deferred and fifty-cents on the dollar for the next 2% of compensation deferred (in total a 4% match); or
Contribute at least 3% of compensation to every eligible employee whether they defer or not.
Safe harbor contributions cannot have “allocation conditions”, e.g., last day of the year employment, or hours of service, in order to receive an employer contribution
You are fully vested in safe Harbour contributions with the exception of “additional, discretionary” safe-harbor contributions.
Under all circumstances, a matching contribution will only be made if you have deferred money into the plan. Don’t miss out on this important benefit by failing to contribute to your 401(k).
Some plans will not offer a matching contribution. It still makes great sense to defer, however. You may be forgoing tax savings for the contribution and tax-deferred accumulation. And how else are you going to save money for retirement.
Some plans state that contributions are “discretionary” meaning that the Employer could decide later it cannot afford to make a matching contribution—even if you contributed.
Some plans require that you meet certain conditions to receive a match. For example, you must be employed on the last day of the plan year; or you must have worked a certain number of hours during the plan year.
Some plans are “safe harbor” plans. Instead of making a matching contribution, the employer will make a “profit sharing” contribution for eligible employees even if they do not defer into the 401(k).
Once a contribution has been processed via a payroll, its designation as a Roth or “traditional” contribution cannot be changed.
Subject to administrative rules regarding the frequency with which you can change the amount of your 401(k) deferrals, you can change how FUTURE contributions are designated as Roth or “traditional”.
PLANNING TIP: If your plan allows for in-plan conversions, traditional, pre-tax plan balances can be changed to Roth account balances. This conversion is a taxable event and the tax liability must be paid with your annual tax return.
Unlike “traditional” 401(k) contributions which are tax-deductible, Roth 401(k) contributions are not tax-deductible in the year you make the contribution.
Unlike “traditional” 401(k) account balances that are taxable upon distribution from your plan, earnings on your Roth account balance are tax-free when withdrawn – providing the distribution is a “qualified distribution.”
For a distribution to be “qualified”, two conditions must be met:
You are over the age of 59 ½;
The Roth account has existed for 5 years.
Distribution of Roth contributions are always tax-free. The question is whether the earnings on the Roth balances are taxable or not.
The plan defines a Year of Service, typically a calendar year in which you work 1,000 hours.
For each Year of Service, you become more vested. Typical vesting schedules give no vesting until you have 2 Years of Service—at which point you are 20% vested. With each passing year, you earn an addition 20% vesting such that you are fully vested after 6 Years of Service.
Vesting is a term that describes your right to receive your account balance upon distribution from the plan. For example, you are 80% vested in an account that is worth $20,000. Upon distribution, you will receive $16,000. The other $4,000 is “forfeited”.
Only if you instruct your plan to send your account balance directly to your IRA or the 401(k) plan of your new employer. This is called a “trustee-to-trustee transfer”.
If you are intending to rollover your account balance, it is best to have it happen via the trustee-to-trustee transfer.
If not, when you do deposit your account balance into that IRA or new 401(k) plan, you won’t have the amount of federal and state withholdings to deposit unless you have other sources of funds. Thus you may inadvertently receive taxable income and a tax penalty.
Yes, if you or your spouse are not “covered” by a workplace retirement plan.
Look at Box 13 on the Form W-2 you receive from your employer for a check mark in the “Retirement plan” box. If it’s checked, your IRA contribution may be limited. If you are still not certain, check with your (or your spouse’s) employer.
Maybe. If you or your spouse are “covered” by a workplace retirement plan, there are limits on how much of your IRA contribution can be deducted.
Check Box 13 on Form W-2
If you or your spouse are “covered” by a workplace retirement plan, the amount you can deduct depends on your filing status and the amount of your “modified adjusted gross income” or MAGI:
Filing Single or Head of Household
Your MAGI is $61,000 or less: full deduction
Your MAGI is more than $61,000 but less that $71,000: partial deduction
Your MAGI is $71,000 or more: no deduction
Married Filing Jointly or Qualifying Widow(er)
Your MAGI is $98,000 or less: full deduction
Your MAGI is more than $98,000 but less than $118,000: partial deduction
If the decedent was required to take a distribution for the year of death and had not yet done so, that distribution must be made and is paid to the decedent’s estate. In other words, it cannot be rolled over under any circumstances.
If you are a spousal beneficiary, you treat the IRA as if it was always yours.
If a Roth IRA, then no distributions are required.
If a regular IRA:
If you have not reached your 70 ½ year, you need not take a distribution.
If you are in your 70 ½ year or later, you must take a distribution based on your life expectancy in the year following the death of your spouse.
If you are a non-spousal beneficiary, you cannot treat the IRA as your own nor roll it into your own IRA. It must be registered as an “inherited IRA.”
Generally, you must begin to take a distribution in the year after the decedent’s death.
EXCEPTION: If the original owner had died prior to taking a Required Minimum Distribution (RMD), you can delay any distribution until the December 31 of the 5th year anniversary of the decedent’s death AND in this instance, you must withdraw 100% of the inherited IRA.
The amount of your required minimum annual distributions are determined by the age at the time of the IRA owner’s death: whether he or she dies before or after the year in which he or she would have taken an RMD
If you have an outstanding 401(k) loan at the time you terminate employment with the plan’s Sponsor, full repayment of the loan is required or it will result in a taxable distribution to you—even if the balance of your account is rolled over into an IRA.
Check with the Plan’s administrator how much time you have before they deem the loan a taxable distribution. At the very longest, it is the last day of the calendar quarter following the calendar quarter in which your employment ended. For instance, you quit on March 1. You have until June 30.
If you go to work for another employer with a retirement plan with a loan program, they might accept a rollover of your old loan into their plan.
The plan of a new employer is not required to accept rollovers from another company’s retirement plan or outstanding loans.
If a rollover of your loan is an option, you have a short window in which to make this happen before your old plan must – according to IRS regulations – deem your loan a taxable distribution.