So back in the 90s when I was young, I had one year in six figures and I was capped. Had my percentage reduced as I recall as I was in sales and had a big year.
In my current job which I started 9 years ago I tried to move my 401k from 6 to 10% and based on that rule I was capped at 8%. The one I linked. If you are in the top 20% of your company income wise, different rules apply.
See what I posted 6 or 7 messages ago.
It let me raise the percentage and then I get a letter stating I can only go to 8 and they reduced it.
I donāt really understand the rule but it happened to me twice - 25 years apart.
It sounds right - I recall vaguely the words non discrimination now that you mention them. I know it hits the top 20% of the company. Honestly I donāt understand it.
Two different things - the HCE rules want to make sure that 401kās are not structured to benefit mostly top-level employees. The plan will undergo certain compliance tests, e.g., whether 60% or more of the plans assets are held by key employees/top earners. One remedy option is for a company to offer profit sharing to level the playing field for the rest ā another is for HCEs to lower their contributions to make the plan less ātop-heavyā.
Another factor affecting high-earners is the annual limit on compensation that can be taken into account for contributions and deductions, currently $330,000.
(In the case of our company, the key employees decided they wanted to maintain their tax-deferral benefit and thus agreed to rather institute the required profit sharing for the staff.)
With the key difference, that with the rent you paid for someone elseās asset, while a mortgage pays towards your own ownership!
So again, rent is a 100% expense (forever lost) - that you can avoid by paying a mortage instead, in which case you are investing the increasing principal (the rest is steadily decreasing interest expended to facilitate ownership).
I donāt know anything about deducting $330K - I mean, as an income, Iāll never make $330K
I get a bonus - but itās based on my pay grade. So even though my job has a salary band that differs $40 or $50K from low to high, all our bonuses are based on a percentage - so the amount of net $$ will be different only because salaries are different (and for a portion of it, your individual grade).
Itās great you understand it.
I just do the 8% allowed and buy munis and then tinker with income stocks. WIth the munis, itās like Iāve built a pension so it works for me!!! The other day, I bought a small bond - and then put 15% of what I spent into small positions in three income stocks I read about online and in Kiplingers, two of which Iād been watching.
One thing about all this - our tax codes and rules are beyond ridiculously complex.
The principal part of the mortgage payment is the investment part, while the interest part of the mortgage payment is the expense for renting the lenderās money.
Everyone has to find a strategy that they are comfortable with.
FWIW - some people might wish to optimize the tax deferral benefit by using those accounts for growth investing, while shifting tax-sensible investments to their regular taxed brokerage accounts.
Exactly - my 401K is heavy in stock and my 529s (I have two - one is set to 2027 even though my kid has just graduated).
I have some equities in non-deferred but mainly I put equities in my deferred and munis in my current - and Iām fortunate that with social security and two small, corporate pensions and then the personally developed muni pension - and yes Iām conservative.
My goal isnāt wealth but to ensure income more than expense - and to sleep at night.
You are spot on - we are all different and have different goals, risk tolerances, and desires.
One thing is for sure -if any of us knew exactly what to do in equities - weād be billionaires, not regular joes hopeful we get it right !!
Your 401k isnāt operating in the safe harbor. The rules are easy to find online but basically they are not doing enough elective or non elective matching.
The 401k must pass a variety of non-discrimination/compliance tests. For example, one of the 401k plan tests requires that key employees (includes those who make >= $215k) cannot have more tha 60% of the total 401k plan assets. One way to get around this limit is give the persons making <$215k a high enough employer match to get to 40%. Another way to get around the restriction is to limit the max contributions of persons making >= $215k or return part of the compensation. My company did the latter once for failing a different non-discrimination test. I received a $300 refund from my previous yearās 401k contribution.
Another option is to have a āsafe harborā 401k plan, which is exempt from most of the discrimination/compliance requirements above. Being a āsafe harborā plan requires things like employer matching with immediate vesting, or non-elective employer contributions.
The person/department who handles your companyās 401k should be able to clarify your restriction and possible options for larger contributions.
As we were going over my sonās 401K this weekend, he has immediate vesting and I thought that odd because Iām used to the five year thing. Iām also used to no match in the first year but it appears - not 100% sure - his matches immediately.
I believe now I can do an extra $5500. I havenāt - but I believe thatās because of the age catch up thing.
I keep forgetting to do so!!! ugh.
Itās still hard for me to grasp - but Iām going to read your note and the one a bit earlier a few times and see if I can get it to make sense.
Itās just one of those things that doesnāt.
I donāt make greater than $215K - although Iād like to
Rothās are great for young people since retirement can seem so far off and they have so many large financial goals they are likely to encounter before retirement. The ability to withdraw contributions without penalty helps them create a rainy day fund that can be tapped if needed and create a saving habit early. For a home purchase, sometimes even some earnings can also be withdrawn penalty free.
There are also tax credits that can match a portion of contributions for retirement savings accounts (up to 50%, income limits apply).
Back to the rent vs owning. Sometimes the non-mortgage costs of home ownership can almost equal a rent. When you total HOA fees, real estate taxes, insurance, maintenance costs, and home improvements, they can really add up. I know my total home expenses for my house in NJ, where the mortgage is long paid off, could rent me an apartment in many places.
I know to rent a property the owner needs to make money after covering all their expenses. But if an owner bought the property when it was much cheaper, has a low rate mortgage or has paid off the mortgage, their monthly costs may be lower than the monthly costs for you to go out and buy a new property at todayās market price and pay a mortgage plus expenses.
Rents are certainly lower in CA because Prop 13 caps property taxes. The owner of a long time rental will be paying far less in property tax compared to the current value and so is able to make money with (relatively) lower rents.
One more thought on rentals. In my neck of the woods in NJ, lots of large rental developments are popping up (none existed before, now tons of open space is being made into large apartment complexes.) The economy of these apartments are very different than a person owning a property and renting to somebody. They have maintenance on staff, pay for management companies, etc. and buy everything in bulk. Some have gotten real estate tax deferrals or discounts to encourage building. Their covering the cost of ownership is totally different, so their calculation of what rent to charge will be very different also.
A ākey employeeā (for purposes of top-heavy testing) also includes:
employees owning >5% of the business regardless of income, or
employees owning >1% of the business, making over $150,000
which could be relevant if the business has some flavor of a stock ownership plan, etc.
And depending on size and hierarchy of a company, itās not unusual for the top 10% to have the large salaries, while the next 10% might be in the āupper rangeā of actually quite ānormalā salaries.
In our company, we thus had people that were far, far removed from $215K, but just happened to make a tiny bit more than 80% of the general staff, or junior hires.
So much of this conversation is way out of my league though I basically understand the points being made (as opposed to the other thread about retirement where most posts are both out of my league and also over my head ).
Iāve always been a renter so I have no opinion on when or why people should purchase a home. However, in case there are other middle income parents reading this thread, I wanted to point out that as I understand it, the new FAFSA (2024-2025) does not add 401k contributions back to family income. So a parent contributing the maximum allowed to a 401k might potentially end up with a significantly smaller income listed on their childās FAFSA. Due to this change, families that were previously ineligible for pell grants may now be eligible (subject to other changes in the FAFSA which may increase/decrease their SAI). I believe that Roth contributions will continue to be added back to a parentsā income on the FAFSA, but I donāt know anything about that type of retirement fund so I could be wrong. I also have no idea whether schools using the CSS profile will continue to add retirement contributions back in when calculating institutional need. I suspect that many schools will continue to see 401k contributions as potential funds for tuition, but I am hoping not since this FAFSA change will impact my D22 (for her junior and senior years in college) and her younger siblings.
Of course, this change in the FAFSA is likely irrelevant to posters trying to help their newly adult children given their childās stage in life, and it is only relevant starting the 2022 tax year since that will be the first used by the new FAFSA. All of that said, if your income and savings puts you in the category that your kid be eligible for federal aid, I think this is something to consider in deciding whether to use a 401k vs. some other form of savings, particularly starting in your childās sophomore year of high school. I imagine before that time, a lot of other considerations would influence the choice to max out a 401K contribution.
I havenāt been able to contribute the max to a 401k for over a decade because Iām āhighly compensatedā as a middle manager. Not enough of our employees contribute. My last, small company didnāt offer a 401k so HSA and IRA was the only savings vehicles.
Home purchase has advantage of investment appreciation (usually, especially if able to stay for many years). But as mentioned there are also expenditures for tax, insurance, possibly PMI if low down payment, sometime HOA. AND over the years there is also a significant amount of maintenance/upkeep (roof, furnace, AC water heater, exterior paint, sometimes sewer/well, carpet replacement, lawn service if hired out or equipment self-mowing, etc etc ). Also other renovations, but much of that is optional.
Thatās not to say folks should not buy a house. Just pointing out that it is hard to quantify all that maintenance/upkeep in comparison exercises.
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