My company has put a cap on my ability to invest in my 401(k) at 11% due to my high-earner status. You said it's good for income, but bad for savings. Any advice on how to plan and save around this cap?

Let me explain what happens when you talk about that. So every year, 401(k) plans are required to do a certain amount of testing because what they want to make sure of is that the participants inside of those plans, the highly compensated participants, either the

owners of the company or the folks that make over a certain income threshold, it's around $150,000 this year, those types of folks are not benefiting disproportionately to what they call the non-highly compensated employee class, anyone that's under $150,000 or so

dollars inside the plan. And so every year you have to do testing to say, okay, this group of people did not receive a benefit that was substantially greater than this group of people. Unless, and a major, I don't know if it's a majority, that's that's hyperbole

that may not be accurate, but I think a good number of plans now actually operate as what are known as Safe Harbor plans. And the way that Safe Harbor plans work is they say, hey employer, if you will put a minimum contribution in on behalf of your employees, and it can be

either like a 3% for zero or if your employees put in 5%, you match 4%. If you'll do at least that much, then we're going to let you automatically pass the testing, so that you highly compensated or your owner class, they can go max out.

their 401(k) they can do the full 23,000 or 30,500 even if none of your other employees participate that's still going to satisfy the testing well what's happened for David's company is their plan it sounds like does not have a safe

harbor 401(k) plan so every year they have to make sure that based on the actual contribution percentages or the actual deferral percentages that group of employees that's higher income does not have more going into the plan than the lower income group of employees so the

very first question David I don't know if it's a big company small company very first question I would ask is if I had a contact in HR or maybe I know someone in management I say hey I noticed that we keep getting refunded these dollars have

we ever considered amending the plan to make it a safe harbor plan have you run the numbers might that be more cost effective for the company and a better benefit and you might be surprised that it might just have been set up this way 20 years ago and nobody revisited nobody

knew that this was an adjustment that can be made that's probably the first thing I would do to see is there a way that we could get it safe harbor so then my contributions are no longer capped at a certain percentage Yeah that that was

the first thing I wrote down check first see if this could be an updated plan to get you out of this hassle and also let you save freely and not be stressed out that they're going to refund restate your W2 it's a big pain in the rear end

and that's why the second thing, assuming that they can't because maybe it's just the way El's compensation is structured, is just way too expensive for them to do that. But um, I would then at least ask for your employer to give you some guidance on what the safe contribution

percentage is or amount is for at the beginning of the year so you can kind of know what you can save and know that you, for the coming year, where you likely will be safe on the contribution and then that will potentially allow you then to to to ask your employer is there

going to be an opportunity at the end of the year to true up, you know, to have a better, let them do some analysis or testing at the year end so you can know if you have some year end bonuses if you can put a little bit extra in without

having to restate the W2 and your contributions and all the things. But that's, that's way I would handle it, is that be proactive on this instead of every year having this bomb blow up on you. You kind of need to take an active

role in this both with trying to get the plan updated or if you can't even get it updated, at least making an active role of trying figure out what's the safe level of contributions you can make with and then maybe you need to squeeze the balloon a little differently and save

elsewhere. That's what I was going to say, after tax account, what you can't do is say, oh well my 401k's capped at 11%, I guess I'm just going to stop saving, while you won't have the tax incentivized savings

like pre-tax contributions to your 401k, what you may be able to do okay well great I'm going to do the 11% there, but then I want to you know make sure I'm maxing out my Roth IRA, backdoor Roths

if I'm higher income, make sure I'm doing HSAs and there's there's nothing wrong with taking that additional percentage that you were going to put in your 401k and just start dropping that into a standard regular after-tax brokerage account and then you're going to go

ahead and be building that step seven, that hyper-accumulation, that third taxable bucket, so just because you can't do it in the 401k doesn't mean that you don't still need to be saving, your goal should still be to save 25% of your

gross income for the future, your future self is still counting on you to have the obligation of saving for the future, you just don't get as much tax-favor opportunity, but you still need to be doing it

"My Job is Ruining My Retirement Savings!"

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The Money Guy Show

High-earner 401(k) investment cap and initial advice.

Company limits 401(k) investment to 11% due to high earner status.

Explanation of 401(k) plan testing to prevent highly compensated employees from disproportionately benefiting.

Focus on preventing highly compensated employees (over ~$150,000) from receiving substantially greater benefits than lower-income employees.

Many plans use Safe Harbor plans to automatically pass testing, allowing high earners to maximize contributions.

Analysis of the current 401(k) plan and potential solutions.

David's company's plan likely lacks a Safe Harbor provision, leading to contribution caps.

Suggesting to inquire with HR or management about amending the plan to a Safe Harbor plan.

Exploring if a Safe Harbor plan would be more cost-effective for the company.

Prioritize checking for plan updates to allow for uncapped savings.

Alternative strategies if a Safe Harbor plan isn't feasible.

If a Safe Harbor plan isn't possible, determine the safe contribution percentage for the year.

Inquire about year-end adjustments to potentially contribute extra without W-2 restatement.

Proactively manage contributions to avoid yearly issues.

Explore alternative savings options if the 401(k) cap remains.

Maximizing savings despite 401(k) limitations.

Continue saving despite reduced tax advantages; aim for 25% of gross income.

Maximize Roth IRA, backdoor Roths (if applicable), and HSAs.

Invest in a taxable brokerage account to supplement retirement savings.

Maintain the goal of saving 25% of gross income, even with reduced tax benefits.

"My Job is Ruining My Retirement Savings!"

"My Job is Ruining My Retirement Savings!"

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