What to Do After You Have Over-Contributed to Your 401(k)

It’s possible to exceed the maximum allowable 401(k) contribution limit set by the Internal Revenue Service’s (IRS). In fact, excess contributions are double-taxed: once in the contribution year, and again when they’re withdrawn.

Below, we consider how an over-contribution to your 401(k) can happen—and the repercussions.

Key Takeaways

• For 2024, the maximum allowable contribution to a 401(k) is $23,000 per year (up from $22,500 in 2023).
• If you are age 50 or older, you can contribute an extra $7,500 in both 2023 and 2024.
• If you over-contributed to your 401(k) plan—that is, you contributed more than the annual maximum set by the IRS—you should let your employer or the plan administrator know as soon as possible.

Understanding What to Do If You’ve Over-Contributed to Your 401(k)

For 2024, you can’t contribute more than $23,000 to your 401(k). (The 2023 limit was $22,500.). The most you and your employer can contribute together is $69,000 for 2024 (up from $66,000 for 2023).

If you are 50 or older, you can make catch-up contributions of an additional $7,500 per year in both 2023 and 2024.

If you contributed too much, should tell your employer as soon as you can, ideally by March 1 of the year after the excess deferral contribution, as it’s technically known, occurred. If you contributed too much in the current tax year, the notification should be provided by March 1 of the following tax year.

The excess deferral amount should be returned to you by April 15. For example, if the excess deferral occurred in the current year, it should be corrected—that is, removed from the account—by April 15 of the following year. This sum should include earnings accrued on the excess amount while it was in your account. You must add the earnings to your taxable income for the year the excess amount is distributed from your 401(k).

Important

If you go over the 401(k) contribution limit, your employer must make changes to your W-2 form to show the returned 401(k) contribution amount as earnings.

In addition, if the excess amount was contributed on a pre-tax basis, your employer must amend your W-2 form so the returned excess contributions as listed as wages. For example, let’s say your excess deferral occurred this year, and you notified your plan administrator promptly. If your contributions were made pre-tax, your employer must amend your W-2 for this year to show the excess deferral amount as taxable wages (in Box 12).

Special Considerations

If the excess contribution is returned to you, any earnings included in the amount returned to you should be added to your taxable income on your tax return for that year. Excess contributions are double-taxed: they are taxed both in the year contributed and in the year distributed.

To avoid the penalties on excess contributions, you must withdraw:

• Excess contributions from your retirement account by the due date of your individual income tax return (including extensions)
• Any income earned on the excess contribution

If the excess contribution is returned to you this year, for example, any earnings included in the amount returned to you should be added to your taxable income on your tax return. If the excess amount is not returned to you by April 15, you could end up paying taxes on it twice: in the year the excess contribution occurred and when you withdraw it.

What Happens If You Go Over the 401(k) Contribution Limit?

If you exceed the 401(k) contribution limit, you will have to pay a 10% penalty for early withdrawal, as you must remove the funds.

The funds will be counted as income, and those extra contributions will cost you at tax time. You will be double-taxed because you’ll pay taxes in both the contribution and withdrawal year. This is why it is so important to remove the excess contribution and earnings on it in the year it was made.

How Do I Report Excess 401(k) Contributions?

If you accidentally over-contributed to your 401(k), you must include it as reported income on your taxes. Use form 1099-R to report it to the IRS.

Can a 401(k) Contribution Be Reversed?

Yes, you can reverse an accidental 401(k) contribution. If you made an unintentional contribution to your plan, you should notify your employer or plan administrator. The excess amount will usually be returned to you by April 15. You must add the amount to your taxable income.

The Bottom Line

One of the most common personal finance advice you might get is this: max out your 401(k) contributions. But under certain circumstances, you might exceed this amount.

The most you can contribute to a 401(k) in 2024 is $23,000 per year. (In 2023, it was $22,500.) If you exceed that limit, you should notify your employer or plan administrator immediately.

Read the original article on Investopedia.