If my employer limits my 401k contributions, can I fund a trad. IRA w/ the remainder below the IRS max?

Question

With my empoyer, I can only contribute 25% of my income. Since I just entered the workforce, my income is too low to hit the IRS max at 25%. I'd like to save more money tax sheltered.

I already contributed the max to a Roth IRA.

Answer 1

Answer is it depends on how much below the IRS max you are and what your household income is. You can only fund up to the IRS max and even then it's only if your income is low enough to be able to contribute to both. Sorry there are no exceptions due to plan limitations.

If you're limited to 25% it's either because your company offers a Defined Benefit Plan too OR they simply haven't changed their plan documents to account for tax law changes. If it's the latter then print out an EGTRRA fact sheet and take it to your employer. The plan should already have been amended for this (and quite possibly already has been).

The IRS limit is 100% of your income up to $45,500 can be put into your plan with a maximum of $15,500 being deferred by you. The company can only take a deduction for 25% of their contributions...any thing over and above that is a non-deductible contribution. The point of that is that with the passage of EGTRRA there is no reason to limit employee deferrals to anything less than 90% because employee deferrals are no longer counted as part of that deductible expense.

Answer 2

That's strange that you would be limited to 25% in a 401(k). Most 401(k)s only limit you to the annual IRS annual additions limitation (aka the 402(g) limit). This must be an old plan you're in.

The 402(g) for 2007 and 2008 is $15,500, not $15,000. It was increased from $15,000 in 2007 for cost of living.

If you are an active participant in a 401(k), your ability to deduct traditional IRA contributions depends on your income as well as whether you are filing married or jointly.

Roth IRA is also an option if you make too much to deduct IRA contributions.

Here is some good info and a Roth/traditional calculator:

Answer 3

The reason why you are limited is because a certain number of employees have to be contributing to the 401K plan. Your company probably does not advertise the plan well or did not change from the opt-in to the opt-out for new employees. The employees need more education about why they should be funding their own retirement and not rely on a pension or social security as their sole source of retirement money.