One of the beautiful ways of having that retirement cushion is to invest in your retirement through your 401K, IRA, Roth IRA, or TSP (401K version for federal employees). One of the benefits of enrolling in your employer’s 401K/TSP plan is that they typically contribute a percentage to it. I’ve had employers who match 3% of my contribution up to 5%. Why wouldn’t you want to enroll in a 401K/TSP plan? Besides the pre-tax benefits and employer additional contributions benefits, I experienced an issue you should avoid. I contributed more than the allowed contribution limit. What does going over the allowed 401K limit look like?
With 401K/TSP contributions, you can set your contribution amount either by percentage or dollar amount. I always tried to maximize the contribution limit. For the longest time, I always did it by percentage always trying to reach the maximum contribution limit. Two years ago, I miscalculated and I actually went over the limit, which was $18,500. Last year, I did the same thing! I went over the limit which was $19,000.
What happens when you pass your contribution amount?
First, payroll doesn’t catch it in time so that means you will receive a W2 summary with the incorrect amount. Both years, I had received amended W2 forms.
Second, in my final paycheck I expected for my contribution to be withheld. Nope! Because my retirement broker knew I would be going over the limit, it defers my contribution to the following year. Instead of reach close to the $19,000 limit, I contributed one less paycheck worth. In addition, you do not get your employer match which is not great either.
Third, you start the new year with your contribution from your last paycheck without any employer matching. This confused me when I was trying to calculate the percentage amount which may have been the reason for my miscalculation.
What’s so bad about this you might ask? Well, I wasn’t able to maximize my TSP like I wanted to which meant I didn’t get the full pre-tax benefit. I missed out on a final employer contribution match. Finally, it confused my calculations where it happened to me twice.
This year I changed from a percentage contribution to a dollar contribution amount instead of a percentage. I set it so that for 2020, I am contributing $19,500 so there’s no way to go above it. Don’t make the mistake I made any missing out on additional contributions and pre-tax benefits. Keep a close eye on your limits. Everything you fine tune today will help towards your goal to financial independence. If you are interested in following my journey, email subscribe to get alerts of latest posts or follow me on Facebook, Instagram, and Pinterest.
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