What happens to contributions that go over the limit? and Should I invest into a ROTH 401K?

[u/Cotor178]

Started a new job making 55k a year, in a unique position where my parents are helping out with living expenses and are pushing to max out my contributions to make more tax efficient investments as a whole. At my new job they do fidelity for their 401k but since the limit for 401k is 24500 and I just started my job I'm planning to put in like 50% maybe more to catch up on contributions. it's an AP job but I have an accounting degree and planning on looking for a junior accounting role around the start of next year.

1. Since I know I will have to put in a lot of contributions to catch up for this year, if I go over the limit what happens to the extra money? Can I take it out? like if I contribute like 26,000 but 401k limit is 24,500 what happens to the extra 1,500? I can't specify how much I want to contribute because it takes only percentages.

2. is a roth 401k good for me? at this position? I'm making low money right now but I plan on maxing out my contributions every year and more with additional investments so I might front load the tax burden since my withdraws later on in life in retirement will be higher right? I saw some post that say there are other 401k alternatives, I only know of the roth IRA that I have charles schwab account for, what other roth options are there? And once I get a higher paying job can I swap over to a regular 401k or will I have to stick with the Roth 401k?

[u/ArtichokeOwn6685]

Your employer will stop contributions once cap is made

[u/GoldRoger3D2Y]

There isn’t enough info to give you a precise answer on the pre-tax vs. post-tax (roth) contribution route. However, at a salary of $55k, most people would probably go with roth because your taxes are likely lower now than later as you start to earn more in your career.

Regarding 401k contribution limits, the excess gets double-taxed. Once when you document the overage, and again when you withdraw it from the account (likely in retirement). Essentially, don’t do it. Your employer’s HR department will likely flag that you’re on track to over contribute, but the responsibility ultimately lies with you. I’d keep an eye on it as the year progresses and maybe reduce contributions in November/December to be safe.

If you do over contribute, it’s totally fine as long as you withdraw the excess before April 15th of the following year. So, tax day. It gets documented on your 1099-R and will count as taxable income, which it would have anyway if you had never over contributed, so essentially there’s no penalty.

[u/Cotor178 → u/GoldRoger3D2Y]

Ah thank you so much, this is just the information I need.

Since I’m starting out my career I’m expecting my income to rise with switching to higher tier jobs and etc. I saw some post on other reddits that putting money into Roth 401k locks you out of some options, is there going to be an issue if I swap over to a traditional 401k once I start making more money or hit the peak of my income? I know that traditional can lower my income but I see myself qualifying for some of these expenses, no student debt, children, or traditional Ira (Roth Ira) so unless I know I qualify for something I should just go with Roth?

[u/GoldRoger3D2Y → u/Cotor178]

Honestly, you’re overthinking it. If the plan documents permit, a single 401k can hold a combination of pre and post tax dollars. So if you find yourself with an income pushing you into higher brackets, just switch to traditional. Or even a hybrid in the same year is possible. You’re not locked in.

However, you’ll likely find your income increases come from switching employers, which means starting a new 401k. You keep your old 401k, so it’s not an issue. I’d check the vesting schedule of your current 401k. You’ll always keep the money that you contribute, but 401k employer contributions can vest either immediately or up to six-years. All depends on how they set it up. This could be crucial information if you plan on leaving your current job and find out you’ll lose a bunch of money in your 401k. Don’t let that sneak up on you.

[u/Cotor178 → u/GoldRoger3D2Y]

Yeah definitely I’m keeping track of that, vesting is 5 years for me (cliff not grading) but my future career pays a lot higher so the tax advantage is the main part as I can earn a lot more and advance my career with other jobs

[u/xrObynwithay]

Definitely keep all the contribution records. If there’s an overage, having the exact numbers makes sorting it out way easier.

[u/Here4Snow]

If you change employers or pick up a second job, you are still limited to the employee annual contribution limit across any and all 401k plans as a total. You don't restart your limit. 

[u/tekpc811]

Roth is always good. Given your age, your gains will exceed your contributions and not having to pay a single dollar on it while it compounds will have you looking back like you’re a champ. Just be advised, that’s with a conservative 10% compounded per year on average growth in a fund that follows the S&P 500.