The most common basic personal finance advice anyone gets is this—max out your 401(k) contributions. But what does that mean? How much is the maximum, and what do you do if you exceed it? And yes, you can exceed it—under certain circ*mstances. Excess contributions, in fact, are double-taxed (in the contribution year and again when it's withdrawn).
Below we consider how an over-contribution to your 401(k) can happen and the repercussions.
Key Takeaways
- The most common basic personal finance advice people get is this: max out your 401(k) contributions.
- Under certain circ*mstances, you can exceed this amount.
- For 2024, the maximum allowed contribution to a 401(k) is $23,000 per year (up from $22,500 in 2023).
- If you over-contributedto your 401(k) plan—that is, you contributed more than the annual maximum set by the IRS—you should notify your employer or the plan administrator immediately.
- If you are age 50 or older, you can contribute an extra $7,500 in both 2023 and 2024.
Understanding What to Do After You Have Over-Contributed to Your 401(k)
For 2024, the maximum allowed contribution to a 401(k) is $23,000 per year (up from $22,500 per year in 2023). The combined amount contributed by employer and employee 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. Check with your human resources department to determine what kind of pace you are on.
If you overcontributed to your 401(k) plan—that is, you contributed more than the annual maximum set by the IRS—you should notify your employer or the plan administrator immediately. Ideally, this notification should be provided 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).
If you accidentally or intentionally go over the approved contribution limits for a 401k, you must let your employer or plan administrator know as soon as possible. Your employer must also take action and make changes to your W-2 Form to show the returned 401k contribution amount as earnings.
In addition, if the excess amount was deferred on a pre-tax basis, your employer must amend your W-2 Form to show the returned amount as wages. For example, assume 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 onexcess 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 occurred and when you withdraw it.
What Happens If You Go Over the 401k Contribution Limit?
If you exceed your 401k 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 401k Contributions?
If you accidentally added excessive contributions to your 401k, you must include it as reported income on your taxes and use form 1099-R to report it to the IRS.
Can a 401k Contribution Be Reversed?
Fortunately, you can reverse an accidental 401k 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, and you must add those earnings to your taxable income.
Correction—Sept. 28, 2022: A prior version of this article incorrectly specified the excess contribution tax on 401(k) plans as limited to 6%. This is only correct for individual retirement accounts (IRAs) and not 401(k)s. It also mentioned that double taxation may occur each year incorrectly. Double taxation only refers to contributions being taxed when they are made and then when they are withdrawn.
