Damn IRS 401k Rules...penalized for working hard...and making too much money!

[Engineer]

Well how about this for a kick in the balls...

I receive a letter from corporate HR today stating that I had contributed too much to my 401k plan for 2005. However, it wasn't because it was above the 14k limit, it was because I was consider a "high income" person (HR said somewhere over 70k). The IRS apparantely has rules that "high income" persons can only contribute "on average" 2% more than the lower income workers (below the above number).

My company had an average of 2.78% for the lower income workers. That set the max that I can contribute to 4.78%. I contributed 15% last year.

So now I'm getting the rest back and have to pay taxes on the money!!!

The only reason that I passed the high dollar threshold is because I worked 1,500 hours of OT last year. So work hard and try to save for retirement and get FVCKED by the IRS!!!

:|:|:|:|:|:|:|:|:|:|:|

Oh, and I was told that they are going to evaluate 2006 by March so that any refunds can be on the 2006 taxes. So I'm going to get slammed by 2005 and 2006 refunds that I had no idea about! What a pisser!

:|:|:|:|:|:|:|:|:|:|:|

I guess the government doesn't want us to try to retire with much more money than the average Joe places in their account...bah!

 

[Slew Foot]

If you save money the economy stalls and the FOG (Friends of Government) dont get to make $$ off you. The government doesn't want you saving too much, that's why they have limits on IRAs, and 401ks.

 

[Squisher]

Wow, that sucks.


Wait until you get to pay AMT. :|

 

[Engineer]

Originally posted by: Squisher
Wow, that sucks.


Wait until you get to pay AMT. :|

Let's hope that if the newly elected Democrats to Congress hold any promise true, it would be to raise the threshold for AMT or eliminate it alltogether. I'm not holding my breath on that one.

I'm still fuming!

Stuck with HSA for health care next year and now can't even save a decent amount for retirement because people won't place money in their accounts. 2.78% contributions by the lower income workers doesn't even get the full company match (takes 3%)!

Edit: Oh, and thanks for letting me RANT!!!

 

[kranky]

I know it would suck to find out you are getting a large portion of your 401k contributions back (and the accompanying tax implications), but don't lose sight of the fact that you are still allowed to save as much money as you'd like.

It's just that the ability to do so without being taxed has rules to prohibit companies from letting all the executives exploit the system. That's why they have the rule that you got bit by (called the Average Deferral Percentage rule).

Your company could be exempt from the ADP test by making contributions to ALL employees and/or meeting some level of matching employee contributions. Do they match contributions? Do they have a lot of low-paid employees?
[edit: I see you mentioned they match 3%.)

 

[GrammatonJP]

at least you can contribute.. i can't even do roth iras anymore.. its fving bs

 

[dquan97]

My wallet thanks you!

<- state auditor

 

[Engineer]

Originally posted by: kranky
I know it would suck to find out you are getting a large portion of your 401k contributions back (and the accompanying tax implications), but don't lose sight of the fact that you are still allowed to save as much money as you'd like.

Oh, I haven't. My brokerage account will now get what I placed into the 401k. Oh, they did say that they might offer Roth 401k's and that they would not be subject (most likely) to the limits since the money is "post tax".

 

[LeadMagnet]

You can also do a couple grand into a Roth IRA in addition to your 401k

 

[FoBoT]

the IRS doesn't make those rules, the Congress does

you need to be mad at Congress , not the IRS , the IRS just enforces the rules given it by the elected Lawmakers

 

[Engineer]

Originally posted by: LeadMagnet
You can also do a couple grand into a Roth IRA in addition to your 401k

Two Roth's already maxed out (mine and my wifes), so no extra for me there!

Originally posted by: FoBoT
the IRS doesn't make those rules, the Congress does

you need to be mad at Congress , not the IRS , the IRS just enforces the rules given it by the elected Lawmakers

You are right. So now I'm pissed at Congress and the IRS! :Q

 

[Legend]

Originally posted by: Slew Foot
If you save money the economy stalls and the FOG (Friends of Government) dont get to make $$ off you. The government doesn't want you saving too much, that's why they have limits on IRAs, and 401ks.

Chances are that money is going into the economy. Unless it's not domestic.

 

[Dr. Detroit]

Originally posted by: GrammatonJP
at least you can contribute.. i can't even do roth iras anymore.. its fving bs

Yep, screwed again!

 

[spidey07]

Welcome to the world of an HCE.

It sucks. They rake you over the coals.

 

[JS80]

Yup. Keep voting democrat :thumbsup:

Engineer: TAX LOOPHOLE. If you know in 2007 you're not going to make as much money or do as much OT, you can write a check to your state tax bureau for the amount you don't want to be taxed on before the end of 2006, then get a refund in 2007 for the overpayment. That way you deduct state tax payments for 2006 federal tax return, but you count as income the refund you get back in 2007 as income in 2007 federal tax return. You can keep doing this until the year you decide to make less money (or happen to make less money) if your income steadily increases. This is a nifty loophole if you know you're going to make too much money in one year, but make less the following year.

 

[DaveSimmons]

That's a terrible savings rate by your co-workers, and they're hurting themselves by not even fully using the employer matching.

The final straw is you'll be taxed every year for the growth of your "excess" retirement investments because you can't put them into a 401k or Roth.

 

[Engineer]

Originally posted by: JS80

Engineer: TAX LOOPHOLE. If you know in 2007 you're not going to make as much money or do as much OT, you can write a check to your state tax bureau for the amount you don't want to be taxed on before the end of 2006, then get a refund in 2007 for the overpayment. That way you deduct state tax payments for 2006 federal tax return, but you count as income the refund you get back in 2007 as income in 2007 federal tax return. You can keep doing this until the year you decide to make less money (or happen to make less money) if your income steadily increases. This is a nifty loophole if you know you're going to make too much money in one year, but make less the following year.

Thanks for the TIP. I'm don't have quite enough deductions to itemize (I might now), so I'll look at my state tax considerations and just might do that. The extra money throws me well into the higher tax bracket (over $10,000 thown back to me that is now taxable from 2005 AND 2006).

 

[Engineer]

Originally posted by: DaveSimmons
That's a terrible savings rate by your co-workers, and they're hurting themselves by not even fully using the employer matching.

The final straw is you'll be taxed every year for the growth of your "excess" retirement investments because you can't put them into a 401k or Roth.

The rate may go up since the pensions were cut for current workforce and eliminated for all new employees. Also, the match was just reinstated in 2006 so that may drive the numbers up a tad, I can only hope!

As for taxed every year, I assume you'll only be taxed on the gains of items (stocks, mutuals, etc) when you sale them and take capital gains (which might be at a lower rate depending on how long I hold them and what Congress does in terms of renewing the lower capital gains tax rates.

 

[DaveSimmons]

Originally posted by: Engineer
As for taxed every year, I assume you'll only be taxed on the gains of items (stocks, mutuals, etc) when you sale them and take capital gains (which might be at a lower rate depending on how long I hold them and what Congress does in terms of renewing the lower capital gains tax rates.

Right, capital gains and dividends. I'm really hoping the Dems don't get rid of the lower capital gains rate since it helps the small investor like me while giving the bigger fish less incentive to try to hide their gains (compared to the old rate).

FYI, an S&P 500 index mutual fund is one of the better choices for a non-sheltered account since it has lower gains than most other funds, especially actively managed ones.

 

[Engineer]

Originally posted by: DaveSimmons

Originally posted by: Engineer
As for taxed every year, I assume you'll only be taxed on the gains of items (stocks, mutuals, etc) when you sale them and take capital gains (which might be at a lower rate depending on how long I hold them and what Congress does in terms of renewing the lower capital gains tax rates.

Right, capital gains and dividends. I'm really hoping the Dems don't get rid of the lower capital gains rate since it helps the small investor like me while giving the bigger fish less incentive to try to hide their gains (compared to the old rate).

FYI, an S&P 500 index mutual fund is one of the better choices for a non-sheltered account since it has lower gains than most other funds, especially actively managed ones.

Have had S&P 500 index fund for about 6 years!

Have one in 401k and a chunk in wife's Roth. Didn't pick one for my Roth as I try to at least stay diversified.

Oh, anyone know the limit of "high income" vs "lower income" when it comes to 401k? HR mentioned a number that was exactly the Social Security income limit last year. Is it tied to the SS limit?

 

[spidey07]

Engineer. I think it is the HCE limit (highly compensated employee)

something like 92K gross. just search IRS for "HCE"

 

[IGBT]

..how else are they going to get the non-worker social handout parasites living as good as you do??

 

[Engineer]

Originally posted by: spidey07
Engineer. I think it is the HCE limit (highly compensated employee)

something like 92K gross. just search IRS for "HCE"

Well, I'm going to hit the limit in 2006 too....even if I took the next three checks with no OT (which I can't because I already turned in the last one). Oh well, nothing I can do. If I start getting close next year, I might look for "comp time" instead.

OK, rant over for now!

(Well, not really! :Q)

 

[spidey07]

You need to speak with a financial planner to help you with all these things. They do this for a living.

In all seriousness they'll help you out to avoid this kind of stuff. Every move you make has to consider the tax implications.

 

[kranky]

Originally posted by: Engineer
Oh, anyone know the limit of "high income" vs "lower income" when it comes to 401k? HR mentioned a number that was exactly the Social Security income limit last year. Is it tied to the SS limit?

I believe it is exactly $100,000 at the moment.