Tax mistakes are the accidental ‘donation’ that nobody wants to make to the government, yet many people who can afford to do so don’t take full advantage of one of the easiest, most reliable ways to reduce their current year tax bill. What’s that?
It’s fully contributing to your 401(k) account, and like the low hanging fruit waiting to be picked in apple orchards right now, there’s a finite amount of time to take advantage of this opportunity (employee contributions need to be completed by calendar year end).
That’s why with fall upon us, and a bumper crop of distractions this year, it’s an ideal time to make sure you’ve contributed as much as you can. And for those who changed jobs this year, it’s important to make sure you haven’t overcontributed across multiple employer plans, which can lead to a tax penalty.
Here’s what you need to keep in mind, and what you can do about it:
Vesting - In terms of retirement plan contributions, it’s important to know that if your employer makes contributions (matching) it may have a vesting period, but all employee elective deferrals (i.e. contributions you’ve chosen to deduct from your paycheck) are always 100% vested.
Contribution limits - For 2020, employee contributions for traditional 401(k) plans max out at $19,500, or $26,000 if you are over age 50 and permitted by your plan ($6,500 catch-up contribution).
Note that contribution limits for elective deferrals are across ALL plans in which you participate. While an employer may stop you from overcontributing to their plan, they don’t have knowledge of what you may have contributed in any of your other jobs. To avoid penalties, you want to make sure you haven’t overcontributed.
If you changed jobs – you will want to make sure that the amount you contribute to both plans combined does not exceed annual limits.
If you have multiple jobs - if you participate in two different employer plans concurrently, the same contribution limits apply. You will also want to consider whether one plan provides more company matching than the other, and ideally be able to max out company matching across both plans.
Also, once you’ve left a job you won’t be able to contribute to that account any more. How come? Because employee contributions are elective deferrals of one’s own salary, and you are no longer earning wages to contribute.
MAKING YOUR DECISION
There’s no one-size-fits-all policy for what to do with your 401(k), which is why it’s important to understand your options. At every age, it’s important that your current (and former) employer retirement accounts are optimized for tax efficiency and growth.
Not sure what path makes the most sense for you? Just ask. Contact Paceline for a free phone consultation. We’ll be happy to answer any questions you have.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.