401(k) limit as percentage of income


J

joetaxpayer

We know the employee deduction limit for the 401(k) is $15,500 for 2007
and 2008 (no increase next year), and if one turns 50 during the year,
they have a $5000 catch-up addition. But I rarely see a percent limit
mentioned, and googling hasn't helped, not has a search at IRS.gov.

I ask because while checking my Flexible Spending Account balance to
submit the final receipts, I saw my benefit site had this note:
"New: You can contribute up to 75% of your pay to the 401(k) plan, up to
the annual IRS dollar limit."
For what it's worth, the percent limit was 30% for this plan in 2007,
and 2006. I'm curious if this is related to the "highly compensated"
imbalance rules, where a 401(k) can have issues if they don't pass a
complex set of rules which compare the deferrals of the higher
compensated to the average, er, Joe employee, or if the IRS has a
maximum percentage allowed, and I just can't find it.

I know someone will ask why in the world would one want to withhold such
a high percentage?
A) One spouse retiring, so total gross still high enough to justify the
pretax savings. Work 3 months, max out the 401(k) and call it quits.
B) Changing jobs, new employer may have a waiting period, same motive to
max out early in the year.
C) Just to front load the savings (and use liquid cash to get by those
few months) and save post tax the rest of the year.
D) Fear of layoff in second half of year.
etc.....

JOE
www.blog.joetaxpayer.com
(I would like to wish both the regulars, and occasional visitors here, a
happy healthy holiday week, and safe New Year. I am honored to be part
of this newsgroup, both for the good work that it does and how while
there's frequently some disagreement, there's always respect for each
other and for our guests. I feel I am a better person for knowing you
all and hope we make those who visit feel the same of us. - JOE)
 
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E

Elizabeth Richardson

But I rarely see a percent limit
mentioned, and googling hasn't helped, not has a search at IRS.gov.
The last 2 places I worked, the employee 401k contribution was limited to a
percentage of income - I've never been able to contribute to the IRS dollar
max, whether I could afford to do so or not. However, my husband's 457 had
no such limit, and, in fact, he was allowed to defer as much as 100% of
income, up to the dollar limit, of course. Although I haven't researched it
lately, I seem to recall that the IRS has no percentage limitation, just the
dollar limit.
JOE
www.blog.joetaxpayer.com
(I would like to wish both the regulars, and occasional visitors here, a
happy healthy holiday week, and safe New Year. I am honored to be part
of this newsgroup, both for the good work that it does and how while
there's frequently some disagreement, there's always respect for each
other and for our guests. I feel I am a better person for knowing you
all and hope we make those who visit feel the same of us. - JOE)

The above comment typifies your attitude here, Joe, and that of so many
others as you suggest. I, too, appreciate it. It feels as if the generous
spirit of this season lasts through the year with the regulars here. Thank
you to all of you for that generous spirit, and may next year be a
prosperous and happy one for all of you.

Elizabeth Richardson
 
B

BreadWithSpam

joetaxpayer said:
We know the employee deduction limit for the 401(k) is $15,500 for
2007 and 2008 (no increase next year), and if one turns 50 during the
year, they have a $5000 catch-up addition. But I rarely see a percent
limit mentioned, and googling hasn't helped, not has a search at
IRS.gov.
There isn't. As long as it's less than or equal to
your income at the employer providing the plan. If
you've got the cash available to live off of during
the time it takes to max out the plan, you can set it
to 100% if the employer's plan permits such (as mine
currently does).
(I would like to wish both the regulars, and occasional visitors
here, a happy healthy holiday week, and safe New Year. I am honored
to be part of this newsgroup, both for the good work that it does
and how while there's frequently some disagreement, there's always
respect for each other and for our guests. I feel I am a better
person for knowing you all and hope we make those who visit feel the
same of us. - JOE)
Nicely said, Joe. Thank you so much - you and all the
others - and especially our kind and patient moderators.
My very best wishes to you all for the holidays and the
coming year.
 
D

Default User

Elizabeth said:
The last 2 places I worked, the employee 401k contribution was
limited to a percentage of income - I've never been able to
contribute to the IRS dollar max, whether I could afford to do so or
not.
I believe, although I couldn't swear, that my company limits regular
contributions to 20% of salary. Catch-up contributions can be up to
50%, but of course that's only $5000 overall.



Brian
 
R

rick++

It changed to years back to the overall limit.
ANy plan/employer can be more strict that the law.
Some may be using older plans or software from when
there were percentage limits.
 
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E

Elizabeth Richardson

rick++ said:
Some may be using older plans or software from when
there were percentage limits.
The last place I worked, 401k contributions were limited to just 5% of
income. That was because the employer also had a profit sharing plan. It was
a shame for the lower paid employees who would have benefited greatly from
additional contributions and for whom the profit sharing would not have put
them over the statutory limit. These same employees were unlikely to have
the discipline and savvy to contribute to IRAs, but might have contributed
more to a 401k.

Elizabeth Richardson
 
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