zlacker

What i don't understand about 401k is why is there such a strict limit on personal contributions, but employer can contribute significantly more? It's all compensation one way or another, why shouldn't I be able to allocate my compensation how I please?

>>hamand+(OP)
If you are self-employed, you can make the normal employee contributions and your employer (also you) can make the additional contributions of roughly 25% of salary. For 2025 this would be a total of 70k instead of the normal 23k

>>hamand+(OP)
The IRS doesn't want 401k to be a tax-avoidance scheme for the rich so individual plans are heavily capped. But you should have the same cap as your employer in a plan they administer.

>>hamand+(OP)
The idea is to replace pensions. An ideal structure as envisioned when these were thought up was probably a fixed size contribution from the company plus substantial matching. That didn’t happen and the things are kinda failures absent actual mandates for employer contributions.

There are two reasons you might not want all retirement savings money to be wholly in control of the saver:

1) Some folks are simply really bad at saving, which ends up being rough for others around them and for society, not only affecting them. This reason tends to rub some folks the wrong way on principle, so they may prefer to disregard it, but it is true as far as it goes (principle aside) [edit: I mean doing anything about this for this reason rubs some folks the wrong way, not that they disagree it’s a real phenomenon]

2) Money directly available to people is freed up for rivalrous zero-sum spending. Think: bidding up scarce resources for your kids, like good schools (which can mean housing). In a world where 100% of comp is employee-directed, this punishes responsible savers.

>>legits+c2
Not trying to be a smartass but the rich have quite enough other very profitable ways to avoid being taxed, where bribing lawmakers is only one of them.

>>hamand+(OP)
Income contributed to a 401k is not taxed at the time of earning. Not putting a limit on contributions would mean you could pay very little income tax. A wealthy person making 200k a year could contribute 100k to their 401k and more than halve their total income tax paid.

>>vunder+G3
Regarding point #1, Singapore uses mandatory retirement savings. If you're pedantic it's not much different than a tax. But functionally it's more like workers are mandated to pay a certain percentag into their 401k.

>>Manuel+T4
But OP's point is that the 200k a year person could instead negotiate a 100k salary with an additional 100k into the 401k (by the employer) and that would be allowed.

Edit: Although it does appear there is a cap to the employer's contribution ($69,000 for 2024 [1]). But I think the general point still stands, why bother to have employer and employee limits.

[1]: https://www.irs.gov/retirement-plans/plan-participant-employ...

>>lesuor+66
Well… they could negotiate $70k/yr from the employer, and that would be allowed (in 2025) without further employee contributions (as that hits the total max contribution limit).

A $200k/yr employee with no employer contribution would be limited to $23,500 contribution (in 2025 limits).

[edit] actually that’s not quite true, though, because IIRC contribution rules have to be uniform, to avoid horse-shit like maxing out upper management at $70k and contributing nothing for lower-level employees, limiting them to $23.5k tax-advantaged no matter how much hard try to save, I.e. to prevent the whole damn scheme from benefiting mostly the already well-off more than it’s probably going to regardless.

>>legits+c2
There's always a way:

https://www.washingtonexaminer.com/news/1143872/paypal-found...

>>FireBe+cb
I mean I absolutely detest Peter Thiel and all, but I don't get why you think having and using a Roth IRA (which is, BTW, not a 401k) is a loophole? I max mine out every year and you should too. You should also recognize that it is to your tax advantage to make your riskiest investments with your Roth account, because sometimes high risk brings high reward, which is then untaxed reward, which is the entire point of a why the government both incentivized the creation of Roth accounts, and limited the yearly contribution to a small ammount to begin with. It's not gaming the system, it's the system functioning as intended.

>>Manuel+T4
>A wealthy person making 200k a year could contribute 100k to their 401k and more than halve their total income tax paid.

They'll pay it when they take it back out. At best they're saving the difference between the bracket rates in exchange for letting your money slosh around the markets for your working life.

>>vunder+G3
There's some pressure towards matching, in that there are penalties if they find only "key" or "highly-compensated" employees have a lot matched or choose to contribute a lot to the plan.

>>potato+9g
401k is taxed at the time of withdrawal, but that's usually at a lower tax bracket.

500k in income 1 year is ~$162k in income tax.

500k in income split across 2 years is $68.5k each year totalling $137k.

It's not massive but it's still a decent chunk of taxes people can avoid.