Contact your plan sponsor right away if you think you have contributed too much to your 401(k) — or you’ll be taxed twice (in the year you contributed, and in the year you withdrew)! If you’re under 59.5 years old, your distributions could also be subject to the 10% early distribution tax and 20% withholding.
Can you contribute too much to a 401(k)?
The IRS limits the amount you can put into a tax-advantaged 401(k) account. For 2023, that amount is $22,500 for individuals under 50 and $30,000 for those age 50 and older. The employer contributions do not count toward that limit but instead count toward an overall limit of 100% of your salary or $66,000 — whichever is less.
Most plan participants never have to worry about over-contributing. The plan administrator tasked with account maintenance will likely keep you from putting too much money into the account each year.
However, you might run into a problem of over-contributing if:
- You switch jobs during the year and start a new 401(k) plan.
- You work multiple jobs with more than one 401(k).
- You received a pay raise or bonus, which included automatic 401(k) deductions.
How to avoid a 401(k) over-contribution
Juggling multiple 401(k)s is challenging. Communicating with your employers and plan administrators to stay on top of the issue is the best way to stay on top of the situation before it ends up costing you big-time.
How to fix a 401(k) over-contribution
The IRS allows until April 15 of the following year to correct an over-contribution error. They recommend contacting your plan administrator to fix the problem by paying out the difference as an excess deferral. The plan administrator will pay you that amount by April 15, which counts as part of your gross income for the year in which it was contributed. The interest earned on the amount is taxed when the money is withdrawn.
Ideally, you will check your distributions in January or February and initiate any withdrawals by March 1, so you’re not left scrambling after the deadline. Should you notice the error after April 15, the excess contribution will be taxed twice – tax on the excess the year it was contributed to the 401(k) and tax on whatever amount is withdrawn from the retirement account.
How to contribute more toward your retirement
If you’re looking to maximize your retirement savings, you are allowed to have multiple accounts. If you reach the contribution limits of your 401(k), for example, you can open a high-deductible health spending account, as well as a tax-deductible or Roth IRA.
Contact Ubiquity
As a small business 401(k) plan provider, Ubiquity is responsive to the needs of employers and employees, including concerns about juggling multiple small business 401(k) plans or over-contributing. We provide employees with financial wellness tools to help you reach your goals.