jIM wrote:
- quote -

Contributing to a non-deductible IRA and then a low-cost variable
annuity would be a better way to achieve this, since the principal is
only taxed once, when it was earned. Whether these vehicles are better
than having investments in a taxable account depends on tax rates, the
time horizon, and other factors.

"jIM" <noreplysoccer[at]hotmail.com> writes:

- quote -

Looks like it - except that it would take quite a while for
the benefits of tax-deferred growth to overcome the losses
of double-taxation of principal.

http://www.fool.com/retirement/retir...port010423.htm
(note numbers on limits are outdated)

What if you have two jobs and can participate in a 401(k) plan at each
place of employment? Or what if you change jobs, and you will
participate in a 401(k) plan at both the old and the new place of
employment? In either event, you must coordinate your contributions to
ensure you do not exceed a combined contribution of $10,500 for the
year. If you exceed that limit, then you must try to get at least one
of the plans to refund your excess contribution.

Regardless of your success in doing that (the plans don't have to
refund your excess contribution, and most won't), then you still must
declare the excess contribution as income for the year it was
made. Don't worry if the excess is not returned to you, though. All
that happens is you will pay income taxes on that sum again when you
begin withdrawals from your 401(k) in retirement. Aside from the issue
of double taxation, an excess contribution is not that big of a deal.

Okay, let's run some numbers.

Suppose you have $1000 of payroll income to invest
over the amount that you are allowed.
marginal tax rate is 25%, your 401k grows at 10%/yr
compounded annually. And, just to make the example
most extreme, if you'd invested that same $1000 in a
taxable account, let's assume that the full 10% growth
is taxed at your marginal rate (ie. your taxable growth
rate is only 7.5% - in truth it would be lower due to
lower taxes on dividends, and the likelihood of long
term cap gains):

$1000 of income today. Since your marginal rate is
25% and you have to pay income taxes *today* on the
overcontribution, reducing your payroll income by
$1000 translates into investing $800 in that 401(k).

In 10 years, it grows to $2075. If you take it out,
you pay taxes on the whole amount (double-taxation),
leaving you $1556 to spend.

Had you taken that $800 after taxes and just invested
it in a taxable account: $1648 spendable - again, with
worst-case ongoing taxation - in reality, it'd be less
bad than that.

In 20 years:
401k-excess: $800 -> $5382 -> taxes -> $4037
taxable acct: $800 -> $3398

The crossover point is somewhere in the middle of
the 12th year. At 13 years, you come out ahead with
the 401k excess contribution in this, um, absurdly
idealized scenario.

There are better ways to get tax-deferred growth
which avoid this double-taxation. (ie. assuming
you cannot make a Roth IRA contribution or assuming
we are talking about in addition to a Roth and/or
non-deductible traditional IRA, you could look into
some of the low-cost VAs or just use tax-efficient
funds in a taxable account, in order to mostly get
long-term cap gains).


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- quote -

This is interesting. Does this mean one can get "tax deferred growth"
on over contributions to a 401k?

One of my friends have this problem too. I think there is a form you
can file with IRS to indicate that this was an overcontribution and
therefore since you paid taxes on this xx overcontribution, it becomes
your basis and when you take out the money after retirement you can
just pay any additional gains you have. But each time you take out
retirement money you can only deduct a percentage of the basis reprot
and eventually when you take out 100% you can deduct 100% of your
basis.

You can send an email to IRS to ask for the form number. it is an easy
form and you should keep a copy of it for yourself.

Applesseeds





Rich Carreiro wrote:
- quote -

Ian Pilcher <i.pilcher[at]comcast.net> writes:

- quote -

In addition to what I already said, you can ask your employer
if they'll put the $4700 contribution-at-the-previous-employer
figure into their payroll system (alternatively, ask them to
cap your contributions at $10,300) so you'll top out right at
$15,000. No guarantee they'll do it, but it would be the
cleanest way.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Ian Pilcher <i.pilcher[at]comcast.net> writes:

- quote -

You can't. Given that you don't know what your 12/31 commission
will be, you'll have to live with an under- or over-contribution.

If you go over, you have two choices. You can request a corrective
distribution from your current employer or you can just leave it
there. If you leave it there, the overcontribution has to be added
back to the wages line of your 1040. There's no penalty for an
overcontribution except that the overcontribution is taxed coming
out of the 401(k) like all other contributions (in other words,
the penalty is that the overcontribution is taxed twice).

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

I changed jobs in April of this year, after contributing about $4700 to
that employer's 401(k) plan. Since I a make a point of maximizing my
401(k) contributions every year, I have the contribution rate at my
current employer set at a rate which will put the total of my
contributions to the two plans just over $15,000. (I will receive a
commission payment on 12/31, so it's pretty much impossible to manage
the contribution amount exactly.)

Since my current employer's plan administrator presumably doesn't know
anything about my contributions to the previous employer's plan, how am
I supposed to avoid contributing more than $15,000 to the two plans
combined (without under-contributing)?

Thanks!

--
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Ian Pilcher i.pilcher[at]comcast.net
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