Changing job and a new 401k
Planning to leave the current employer in several weeks. Already maxed out the 2025 employee contribution limit of $31,000 and approaching the total contribution limt of $77,500 including a 6% match and after tax contributions. What is the best way to use the 401k of a new employer if it has a generous match and after tax contributions? Currently, 35-37% federal tax bracket and low on Roth portion.
Permalink Submitted by Alan - IRA critic on Fri, 2025-05-09 18:43
Your elective deferral limit for 2025 has already been reached, so you cannot make elective deferrals to the new plan until 2026. However, if the new plan provides after tax non Roth contributions (known as “employee contributions”, you could make up to 70,000 of such contributions. The plan may match these contributions up to a limit, but most plans do not match employee contributions. You would have to check with the plan administrator.
Some plans that offer employee contributions also allow you to convert them in plan to the Roth 401k account. Some do this automatically with each paycheck, others limit the number of these in plan rollovers. Some may allow you to roll the employee contributions out to your Roth IRA, others will not. But beware of the ACP test for higher income staff, which could result in a reduced limit even if they otherwise offer employee contributions.
Permalink Submitted by learner on Fri, 2025-05-09 20:40
Thank you for the explanation. If an intentional over-contribution to 401k is not illegal and the only downside is that the contribution is not eligible for income tax deduction, can there still be an upside?
For example, over-contribute $20,000, get a match of $20,000 and contribute the remaining $37,500 to after tax >Roth (over 50). With a combined fed and state tax rates of about 50%, the “effective” 401k balance will be $20,000+$20,000 (match)-$10,000 (2025 income tax)=$30,000 in addition to $37,500 in Roth.
Permalink Submitted by ssel on Fri, 2025-05-09 20:39
Alan wrote: “Your elective deferral limit for 2025 has already been reached, so you cannot make elective deferrals to the new plan until 2026.”
I’m always nervous contradicting Alan, but that’s not quite correct. You cannot defer taxes on more than the elective deferral limit, but you can still contribute to the new 401k (let’s assume pre-tax as that’s much simpler), then pay taxes on the excess deferral by adding it to Line 1h of your 1040. It’s all clearly spelled out right in the Line 1h instructions. The effect will be that the excess is taxed twice: once this year — which will happen no matter what choice you make — and again when you withdraw it, possibly decades from now.
You mentioned that the new employer may have a generous match. While double taxation is not in itself a good thing, a sufficiently generous match can more than compensate for it. For example, if the match is 50% and you’ll be keeping the money in the pre-tax account for a few decades, it’s almost certain to be the case that the value of the excess contribution exceeds the cost of the double taxation.