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Suppose that I change jobs halfway through the year.

  • My first employer matches 50% of 401k contributions. By the time I leave, I've already contributed enough to hit IRS limits: $18,000 in my contributions with $9,000 matching.
  • My second employer also matches 50%. They allow me to contribute another $18,000 with another $9,000 matching.

All contributions and matching vest immediately. I withdraw the $18,000 from my second employer to avoid the 401k over-contribution penalty. What happens to the second $9,000 matching contribution?

Andrew Mao
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2 Answers2

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The first employer matching contribution gets taken back. You don't want to mess around with over contributions like this. In addition to withdrawing over contributions, they withdraw some portion of investment gains. The accounting gets complicated so best to avoid the issue.

minou
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If job2 has a match greater than 2x the tax penalty due, I'd recommend max contribute to second job, get the match and pay the tax penalty (actually doesn't even have to be 2x, depending upon investment growth). The penalty for over contributions is you'll be taxed twice. The initial contribution (excess deferral amount) is taxed at current year's rate then also taxed upon withdrawal in retirement at then future year's tax rate. Therefore, max out the match, pay a tax penalty and get more money in your 401k.

Jack
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