If I have more than one employer can I have more than one 401k limit of $14 000?
By Paul Smith
One of the questions we get asked a lot is, I know the limit that the IRS
puts on my 401k contributions for the year is $14000 (for a person under 50)
(2005) but is this the limit I can get from one employer or is it the total
amount I can get from all my employers? So if I had 5 jobs could I get a total
of $70 000 5 x $14 000 in contributions?
The simple answer is $14 000 is the personal limit you have as an individual
and there for the total from all your employers, so if you have more than one
employer then between you all the total that can be added for each year is $14
000. If you do over pay into the plans you have, it is easy to do if you are
running more than one plan with more than one employer making contributions, you
can claim back the overpayments but the claim must be made by 15th March.
The part of the IRS guidelines that causes a lot of confusion with reference
to these limits is this paragraph;
"Additional limits. There are other limits that restrict contributions made
on your behalf. In addition to the limit on elective deferrals, annual
contributions to all of your accounts - this includes elective deferrals,
employee contributions, employer matching and discretionary contributions and
allocations of forfeitures to your accounts - may not exceed the lesser of 100%
of your compensation or $42,000 (for 2005, $44,000 for 2006). In addition, the
amount of your compensation that can be taken into account when determining
employer and employee contributions is limited. In 2005, the compensation
limitation is $210,000; for 2006, the limit is $220,000."
Now a lot of people ask us at http://www.the401k.info how the limit can be
$42 000 and this is the best explanation we have seen so far,
Ok, let's say you make $260,000 per year, your plan allows you to defer up to
100% of your compensation, and your employer matches all your deferrals up to 3%
of your compensation plus makes a 5% profit sharing contribution to all
participants. In your case, for 2006, you could defer the maximum legal limit of
$15,000 (roughly 6.8% of your legally capped compensation of $220,000), receive
a match of $6,600 (3% of your legally capped compensation) plus $11,000 in
profit sharing contribution (5% of your legally capped compensation), for a
total of $32,600, well below the $44,000 overall contribution limit. If,
however, your employer decided to make a 15% profit sharing contribution
($33,000) instead of a 5% contribution, because the total of these contributions
exceeds the overall limit of $44,000 for 2006, your profit sharing contribution
would most likely be reduced so that you would not exceed the overall limit. As
you can see, there are numerous limits applied in different situations in
different layers that must be adhered to.
About the Author
Paul Smith has been a tax specialist for 20 years, teaching and working in the financial industries his free ebook is available here get 401k info Now.
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