Personal Finance 401k Plans

BamaNation

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Updated 10/21/22 with 2023 contribution limits

As always, I offer no credentials nor am I a financial advisor. I do offer to the reader my own research and opinions which should be checked with your accountant or tax advisor and your own investigation before taking any actions based on this post or the links it contains. Caveat emptor!


OVERVIEW
This thread is meant to be a summary of information about 401k plans and provide some beneficial and informative links to good sources for further information and maybe provide some "Hey, I didn't know that about 401k's!" insight. It is not meant to be comprehensive and, as always, you should check your plan documents and with your plan provider for specifics to your situation.

SOME 401K RULES
This is not comprehensive, but does list a handful of the important rules:
  1. In 2023, your maximum individual contribution is $22,500 (or $30,000 if over 50 years old)
  2. IN 2023, the IRS also allows you & your employer to put a total of $66,000 (or $73,500 if over 50 years old). This means you can contribute, your employer can match your contribution, and your employer can contribute up to that limit.
  3. 401k limits are separate from other limits (457b, IRA, HSA, 403b, FSA, etc.)
  4. You are generally penalized if you withdraw funds before the age of 59.5. There are exceptions but you should consider your 401k investment to be to that age before you withdraw.
  5. You DO NOT have to withdraw or transfer funds out of your 401k if you change jobs. It may or may not be a good idea to transfer to your new employer's plan (or an IRA) but you should understand costs, options, etc. in BOTH plans before doing any transfers. Definitely DO NOT withdraw from the 401k just because you change employers. You will pay the IRS a 10% penalty if you do so!
ADVANTAGES OF 401k (per Bogleheads.org)
  • Immediate tax break (contributions come out of check before taxes are withheld).
    • Simplified example: You are in the 20% tax bracket. You contribute $1000 per month to your 401k. Your taxes are reduced by $200. Thus saving $1000 only "costs" you $800.
  • Employer Matching (i.e. you contribute 5% of your salary and employer matches first 3% plus 50% of the next 2% so the amount you have in the 401k is now 5% + 3% + .5% + .5% = 9%)
  • Growth is tax deferred. This applies to dividends, capital gains, and other distributions. You don't pay taxes on these as you would in a taxable brokerage account.
    • Simplified example: You are in the 22% tax bracket (which means you pay 15% on capital gains). You contribute $1000 per month to your 401k and $1000 per month into your brokerage account. Your dividend yield in each account is 5% for the year. You now have $1050 in your 401k and $1,050-(50*15%)=$1,042.50 in your taxable account.
  • You can exchange funds and/or do buying/selling in a 401k account without having to pay capital gains taxes.
    • Simplified example: Assume you bought 100 shares of a fund that cost $10 on January 2, 2020. That fund goes up to $12 at the end of the year and you decide you want to sell it in the 401k account and buy a different fund because you want to re-balance your asset allocation. You can sell the old fund and collect $1,200 in the 401k account and buy the new fund without having to pay capital gains on the $200 gain from the sell.
    • HOWEVER, if you did this in your taxable brokerage account (and assuming you have to pay a 15% capital gains rate): You would end up with [$1,200-(200*15%)]=$1,170 in your taxable account.
    • Multiply these numbers by 30 years of transactions and growth and gains and the numbers become staggering: Imagine you have a 10% average yearly growth/return in the same two accounts. You sell both in 2050 (and are still in a 15% capital gain rate: Your 401k now has about $10,000 and your taxable brokerage has [10,000-(9000*.15)]=$8,650
  • You can usually contribute a lot more to a 401k than an IRA.
DISADVANTAGES OF 401k (per Bogleheads.org)
  • Generally penalty-free withdrawals are not available. Withdrawing before age 59.5 usually results in a 10% penalty
  • Fund availability and expenses may erode returns.
  • Employer can change funds and provider at any time
  • Not insured
  • Vesting of employer contributions may require longer-term commitment to company
OTHER 401K INFO
  • When employment ends at one employer, you don't have to rollover funds to the new employer plan. You do have options: leave money where it is, move to new plan, move to an IRA (called a rollover), take a distribution (possibly with penalty)
  • Required Minimum Distributions (RMDs) must be taken according to the appropriate IRS RMD table after age 70.5
  • After-tax 401k contributions are available at some employers.
  • Many plans do not provide indexing options that are low expense. Don't just accept this as something that is unchangeable.
  • You should advocate for your company to provide low-cost indexing options and an appropriate plan that meets your needs!
  • Solo 401K plans can be a great way to save more than the individual limit. Good for sole propritors, partnerships and some corporation structures.
LINKS
TideFans Personal Finance
[These links are also now under Personal Finance in the secondary navigation menu near the top.]

 
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4Q Basket Case

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As always, BN provides excellent information.

The most important thing is to get started.

1A is to have an honest discussion with yourself and your spouse about what’s a need vs. what’s a want. Does it keep a roof over your head, put food on the table, keep the utilities paid, and get you to work on time, or keep you equipped and looking the way your employer wants so that you can do your job effectively? Yes? Then it’s a need. Pretty much everything else is a want.

And don’t rationalize with yourself. Needing reliable transportation to and from work can come from a good used Toyota Camry. You don’t “need” a block-long F-250 with all the bells and whistles. A Timex watch will tell you the time. You don’t “need” a Tag Heuer or Rolex.

Next is to stick with it....No. Matter. What. One of the few exceptions is if you lose your income, or think you’re about to. That could be due to getting fired, downsized, laid off, your employer going under, or dealing with a medical issue for yourself, your spouse or your child. Then you stop investing, put that money aside for the impending rainy day, and start back up investing the instant your situation stabilizes.

Other exceptions are limited to keeping your house out of foreclosure, your car from repossession, the lights on, the IRS happy, and yourself and your spouse out of jail.

Yeah, that’s a pretty high bar. As it should be.

Increase your investment every time you get a raise or bonus. If your employer offers a 401k or similar investment vehicle, don’t think of yourself as “maxed out” when you contribute the most your employer will match.

You’re not really maxed out until the IRS won’t let you contribute any more. Even then, the IRA is still open to you. Even then, there are still taxable investment accounts.

Even if your employer doesn’t offer a 401k, BamaNation points out several alternatives.

”Needing” a trip to Disney World, ”needing“ to buy your 16-year-old a new car, and “needing“ a dream kitchen or backyard pool are not reasons to either reduce or stop investing. They are wants, not needs. If you can't maintain your investment schedule, and pay for the whipsy-doodle, you can't afford the whipsy-doodle.

Pay off your mortgage early. Have a 30 year note, but pay on a 15 year schedule. If you upgrade houses, keep your original target payoff date, and don’t reset to 15 years from the date of the new mortgage. If you can’t do that, you can’t afford the new house.

I know, I know, “Why would I pay off 4% debt when I can invest at 8% long term?”

Two reasons why: (1) are you really going to invest the difference, every single stinkin’ month for 180 months? Or are you going to inevitably find some other “necessary” use for it, “just for now....I / we deserve that”?

And (2) it assumes a smooth exponential 8% return on your investments. Which doesn’t happen in the real world. It’s a sawtooth, with a definite upward bias....but a sawtooth path to getting there. And if it happens to be in a downturn at your target date, your fundamental assumption falls on its face, your investments are down, and you’re still cracking that nut every month.

I’m telling you, the feeling of liberation that first month when you have no mortgage payment is better than any drug in the universe. It’s more money available for investing. Or, if you’re truly maxed out on your investing vehicles (see above for a reality check on that), it really is fun money.

But better than that....it’s guilt-free fun money because you’ve already laid a fantastic financial foundation.

It’s all about delayed gratification.

The cool thing is, if you do this from age 22 - 42, you’ll be able to have all the toys starting about then.

As Dave Ramsey says, “Live like nobody else [for a while], so you can live like nobody else...for the rest of your life.
 
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UAH

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Pulled this graphic off an investment analysis I received yesterday. Some of you may have an interest.
Market Cap Comparison.PNG
 
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BamaNation

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When you have HUUUUUGEEE profits you get that market cap. These are HUUUUUGEEE companies and the 5 you point to have incredible growth, as well, for large companies, because they offer tomorrow's technologies in one way or the other, so they have today's profits and growth PLUS tomorrows profits and growth priced at a premium. PLUS they've been hugely profitable over the last 6 months when others have struggled to grow or profit so they are being rewarded all the way around. It's amazing there are FOUR TRILLION dollar companies of those 5. FB is about 680B.

The others are really solid companies all the way around. Well managed, good dividends, profitable , growing (for the most part), etc. Which means they're probably under priced right now. One can choose to figure out which firms are underpriced OR one can buy the whole market and capture the market return (which beats active trading / funds about 85-90% of the time over the long term). I'm not smart enough (and don't have ESP) so I choose the latter.
 
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BamaNation

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I will update the first post later with the new amounts, but ...

The IRS just announced today that they're making the largest ever increases to 401(k) (and similar plans like TSP, 403b, and most 457b) limits for 2023...

Employee contribution limits for 2023 jump $2K to now be $22,500.
Catchup contribution limits for employees aged 50+ jump to $7500

So, if you're 50+. total max contribution is now $30,000.

irs.gov said:
IR-2022-188, October 21, 2022

WASHINGTON — The Internal Revenue Service announced today that the amount individuals can contribute to their 401(k) plans in 2023 has increased to $22,500, up from $20,500 for 2022. The IRS today also issued technical guidance regarding all of the cost‑of‑living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2023 in Notice 2022-55PDF, posted today on IRS.gov.

Highlights of changes for 2023
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $22,500, up from $20,500.

The limit on annual contributions to an IRA increased to $6,500, up from $6,000. The IRA catch‑up contribution limit for individuals aged 50 and over is not subject to an annual cost‑of‑living adjustment and remains $1,000.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $7,500, up from $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan who are 50 and older can contribute up to $30,000, starting in 2023. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans is increased to $3,500, up from $3,000.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver's Credit all increased for 2023.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer's spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase‑out ranges for 2023:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $73,000 and $83,000, up from between $68,000 and $78,000.
  • For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $116,000 and $136,000, up from between $109,000 and $129,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $138,000 and $153,000 for singles and heads of household, up from between $129,000 and $144,000. For married couples filing jointly, the income phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.

The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $73,000 for married couples filing jointly, up from $68,000; $54,750 for heads of household, up from $51,000; and $36,500 for singles and married individuals filing separately, up from $34,000.

The amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500, up from $14,000.

Details on these and other retirement-related cost-of-living adjustments for 2023 are in Notice 2022-55PDF, available on IRS.gov.
 

BamaNation

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Expected Changes in 401k legislation
Congress is on the verge of passing legislation that makes some changes to 401k plans
  • Raises age that people are required to start withdrawing money from 401k accounts to 75 (from 72) in multiple steps over the next 10 years
  • Provides for emergency savings accounts inside 401k plans by allowing up to $2500 in a "rainy-day Roth" account inside the 401k. Eliminates taxes and the 10% penalty that would otherwise be owed if money is withdrawn from the emergency savings account.
  • Increases retirement savings contribution limits for older workers
  • Increases incentive for lower-moderate income workers to save in retirement accounts
  • Requires automatic enrollment in new 401k/403b plans at between 3% - 10% of pay and raises the savings rate by 1 percentage point per year until it hits 15%. Obviously, employees can dis-enroll but if you're getting a match, don't do that!
  • Raises catchup contributions for age 60-63 workers to at an additional $11,250. Currently age 50+ can add an additional $7,500 per year. The new legislation gives 60+ an additional $3,750 per year to contribute.
  • Roth 401k accunts will be able to skip required distributions starting in 2024
  • Allows rolling up to $35,000 from 529 plan accounts into Roth IRAs for accounts in existance for 15+ years. Subject to current Roth contribution limits for high-earners.
  • Allows some penalty-free withdrawals for certain situations (terminally ill, domestic abuse vicitms, long-term care insurance, disaster zone residents)
  • Creates a tax credit of $1000 annually into retirement yaccount beginning in 2027 regardless of income tax liability.

According to linked the WSJ article ($$$) passage by Congress is imminent and President Biden is expected to sign.

My take: I like these changes.

update: I found this Forbes article that, while not nearly as well written as the WSJ one, is free and does have some of the same details. And this one from thinkadvisor has some more info.
 
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BhamToTexas

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  • Allows rolling up to $35,000 from 529 plan accounts into Roth IRAs for accounts in existence for 15+ years. Subject to current Roth contribution limits for high-earners.

This is interesting, but does it mean high-earners can only roll over an amount equal to the contribution limits? Or it replaces your current contribution limits?
 

BamaNation

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Does that apply to IRA RMD's too?
great question.

Here is the actual bill that passed the US House in March and was sent to the Senate https://www.congress.gov/117/crpt/hrpt283/CRPT-117hrpt283.pdf

The Senate has a similar bill

The Forbes article link I added to the bottom of the first post seems to indicate yes, but I am looking for specifics. My reading of the House bill also indicates yes. However, as you well know, anything can change is the sausage making of legislation that ultimately is signed into law!

“Forbes.com said:
The Secure Act 2.0 would, for the second time since 2019, increase the RMD age. In the new bill, the age when retirees must begin drawing from non-Roth tax-deferred retirement accounts would increase to 73 in 2023 and 75 in 2033. Individuals who have already starting RMDs cannot stop.
Some other links :
 
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BamaNation

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  • Allows rolling up to $35,000 from 529 plan accounts into Roth IRAs for accounts in existence for 15+ years. Subject to current Roth contribution limits for high-earners.

This is interesting, but does it mean high-earners can only roll over an amount equal to the contribution limits? Or it replaces your current contribution limits?
I read it as high-earners are limited based on current Roth law but that may be an incorrect understanding. The bill passed by the house is nearly 100 pages. I have read through it but some of the points are still unclear to me! I have added some more article links and the actual bill link above.

the thinkadvisor article linked above says this:

thinkadvisor.com said:
Section 126: 529 plan rollovers to Roth IRAs.
This section amends the Internal Revenue Code to allow for tax- and penalty-free rollovers from 529 accounts to Roth IRAs, under certain conditions. Beneficiaries of 529 college savings accounts would be permitted to roll over up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA. These rollovers are also subject to Roth IRA annual contribution limits, and the 529 account must have been open for more than 15 years. This section is effective with respect to distributions after Dec. 31, 2023.
 
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BhamToTexas

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I read it as high-earners are limited based on current Roth law but that may be an incorrect understanding. The bill passed by the house is nearly 100 pages. I have read through it but some of the points are still unclear to me! I have added some more article links and the actual bill link above.

the thinkadvisor article linked above says this:
Ah, that's my kids rolling it over into their Roth IRA, not back to pops.

Thanks!
 

BamaNation

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Ah, that's my kids rolling it over into their Roth IRA, not back to pops.

Thanks!
I think that's correct and they could be limited if they're high-earners when they do so. If correct, I think one way to do this is that, as beneficiaries, if they earned a scholarship, they could take the equivalent amount from the 529 and roll over to a Roth because they wouldn't have much income ... but we'll have to see the specifics once it actually passes. Or after they graduate, it could roll over - subject to same limitations.

Obviously, check with your tax advisor :D
 

4Q Basket Case

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The most notable provision in the new bill increases the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account to 73 from 72, beginning January 1, 2023. In 2033, the RMD age will increase again, to 75.Dec 23, 2022
Congress Passes Major Boost to Retirement Savings
The bill is a nice move in the right direction, and I support it. However, it plays on the public’s focus on the contribution limits, particularly the catch-up years after age 50. IOW, it fosters the impression that it's OK to live paycheck-to-paycheck when you're young, because you can always "catch up" after you're 50.

That's simply not the case.

There is unquestionably a benefit here, and anyone over 50 should take full advantage. But you get a far bigger boost if you max out (defined as the maximum contribution allowed by law, not the maximum that your employer will match) in your younger years.

As impossible as that sounds, even if you can’t do it Day 1 (very few can), there are ways to get there. All of them involve sacrificing bonuses and wage increases. And it sucks for about 8 - 10 years -- believe me, I know. But you can do it, and the payoff is fantabulous both financially and psychologically.

The focus should be on your investing behavior between the time you start your working life and the time you retire, not bones the government throws you 30 years in. The sad mathematical truth is that, at that point, the benefit just isn't all that great.

Bottom Line:

1. Time is both your most valuable and most perishable asset. Once it passes, no amount of anything can get it back.

2. Exponential math on early contributions, even if they're less, beats the benefit of late-stage contributions all up and down the field. So do both, but don't rely on mis-labelled "catch-up" contributions after age 50 to make up for not investing when you're 25.
 
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