My 401k Plan Won't Allow Contributions Beyond 20% Of Gross Income. Why Is There A Limit In These Plans?
I’m curious to know the reason why someone can’t contribute as much as they want to their 401K plan.
I’m curious to know the reason why someone can’t contribute as much as they want to their 401K plan.
it’s to protect people who are classified as “highly-compensated employees” by the federal government.
basically, if you make more than however much money, you are limited in what you can contribute to something like a 401(k) by how much the other people at the company contribute. so if the company places limits on the other employees, where the max is lower, it artificially inflates the funding stats for the company.
for example, if you make $50k, and were going to contribute (after match) $5k, no matter what, then without the 20% cap, you would be a little less than 1/3 of the max contribution. But, if you’re capped @ 20% ($10k), then you’re contributing 50% of the max.
since the 20% rule doesn’t negatively impact the “highly-compensated employees” anyway (as 20% of their salary would be over the IRS max), this lets those people contribute more to their own 401(k)s.
and since everyone on the retirement committee at your company is almost certainly a “highly-compensated employee,” they twist rules like this in their favor.
1) The federal government limits it so it does not delete current revenues too much,
2) Companies limit it due to laws concerning highly compensated people.
Contribute to you Roth IRA.
it’s all regulated by the government. By the way 20% is a great amount. The big issue is , how nmuch do they contribute?