Taxes and Roth 401k Contributions

[Zooey72]

My wife and I have developed a new strategy for our retirement, but I have run into a bit of a snag in figuring out in what way taxes are taken out of her paycheck.

My wife makes 40k a year, and her employer offers a ROTH 401k which we are now taking advantage of.  It matches 4 percent at a 100 match%.  My wife is 55 years old.  We have decided that for the remainder of her working life she will contribute as close to the max of 26k a year that we can, which currently translates to her contributing 70% of her income to her 401k.  I make enough money to where I can cover all of our expenses and we should be able to live comfortably until retirement.  However, although I make good money (over 100k a year) my employer offers nothing in the way of benefits, so we get all of our benefits from her employer. 

The max her company will allow her to contribute is 75%.  We have no issue if she has no actual income coming into the house, and all of her money goes into her ROTH 401k. However, we do have an issue with too much money being taken out and not enough left in there to cover our health insurance.

So this is my question.  Do employers first take out tax and insurance and than use what is left over as a percentage?   So with her 40k lets say tax and insurance equals 10k a year, leaving her with 30k, of the 30k $22,500 would go to her ROTH 401k.  Or, do they take out the money first from her gross income of 40k (which would be 30k), and than subtract tax and insurance? 

I am aware of the 26k limit for her.  Or to put it more plainly, if her employer allowed a 100% contribution would they take out the insurance and tax before putting the rest in, or would she not have money left for her insurance?

[QDROphile]

I am confused by her ability to "contribute" $26,000.  In a 401 (k) plan, an employee's elective deferral limit is $19,500 for 2021.  The Roth contribution feature lives by the elective deferral limits, too.

A well-drafted Summary Plan Description would describe contributions, contribution and deferral limits, and calcuation procedures, and would have illustrations and examples. Start there to understand how the plan works.

[Mike Preston]

2 minutes ago, QDROphile said:

I am confused by her ability to "contribute" $26,000.  In a 401 (k) plan, an employee's elective deferral limit is $19,500 for 2021.  The Roth contribution feature lives by the elective deferral limits, too.

A well-drafted Summary Plan Description would describe contributions, contribution and deferral limits, and calcuation procedures, and would have illustrations and examples. Start there to understand how the plan works.

Did you miss the fact that she's age 55?

[Zooey72]

Ya, she can do $6500 more catch up because of her age.

Depending on what the rules are I am considering having her employer withhold nothing in taxes and I will just pay her taxes with my money when it comes due.  If that allows us to get closer to the 26k max I would be more than happy to do it.

[C. B. Zeller]

Typically a 401(k) election that is expressed as a percentage will be applied to gross pay (before taxes, medical premiums, or other deductions or withholdings). That is a general trend, but not a rule, so you should confirm with your wife's employer.

Most 401(k) plans will allow you to make an election as a dollar amount per pay period, instead of a percentage of pay. If your goal is to defer the annual maximum it might be more practical to do it that way, so you would not have to worry about periodic fluctuations in her pay.

You will also need to ask them what they do if her gross pay is not enough to support her elected 401(k) amount after tax withholding, medical premiums, and any other deductions. They might do the maximum, they might do nothing, or they might have some other procedure. Again there is no universal rule on this, but they should have an established procedure in place.

[CuseFan]

And remember, Roth is post-tax so in addition to medical insurance, FICA and Medicare taxes, and any other withholdings, federal and state taxes will be withheld, and I would think the Roth deferral comes last.

401(k) is withheld off of "plan compensation" which is often gross pay, although there may be some exclusions. As Q said, refer to the SPD.

You should be able to model this to see if there is enough left over, after all other deductions, to satisfy the elected deferral percentage and, if not, adjust accordingly - either lowering the percentage or electing a sustainable flat dollar amount of the plan allows.

[Patricia Neal Jensen]

So far two inappropriate entries to this Board.

 

Mike Baker.... someone needs to explain what we are doing here to this guy.  Thanks!

[Mike Preston]

2 hours ago, Patricia Neal Jensen said:

So far two inappropriate entries to this Board.

 

Mike Baker.... someone needs to explain what we are doing here to this guy.  Thanks!

Who is Mike Baker? :-0

And I see nothing inappropriate in this thread.  In fact, I find it kind of interesting. The OP gets kudos for finding the right subsection within which to post.