I contributed too much to my 401(k). What do I do now?

SmartAsset: What to Do When You Overcontribute to Your 401(k)

Just found out you overcontributed to your 401(k) plan? If you act quickly, you can minimize the damage. But if you wait, the tax bill and inconvenience will multiply. So if you contributed too much to your 401(k), the plan administrator must return the excess funds. Let’s take a look at the steps you need to take to remedy the situation.

If you have more questions about planning your retirement, work with a financial advisor to maximize your retirement strategy.

What is the maximum contribution?

What is the maximum contribution for a 401(k) plan? According to the IRS, the maximum contribution for employees participating in 401(k) plans is $22,500 for the year 2023.

But if you’re 50 or older, you can contribute more than $22,500 as a “catch-up” contribution. In 2023, the catch-up contribution is $7,500, bringing the total you can contribute to your 401(k) to $30,000 if you’re 50 and older.

These amounts are often updated on an annual basis. In 2022, the maximum contribution was $20,500 and the catch-up contribution was $6,500. Make sure you refer to the correct numbers for your calculations.

Now, these figures do not include employer contributions. If your employer offers a contribution, they have different limits. In 2023, the total amount you can contribute, including any employer contributions, is $66,000 or 100% of your salary. But the only problem you have is if you personally go over the individual contribution amount.

What to do if you have contributed too much

SmartAsset: What to Do When You Overcontribute to Your 401(k)

SmartAsset: What to Do When You Overcontribute to Your 401(k)

Now if you realize you’ve contributed too much, don’t panic – this can usually be fixed with minimal hassle as long as you act quickly. Here are some steps you need to take:

1.) Contact your employer or plan administrator immediately

Tell your employer that you have contributed too much. Time is of the essence – catching the mistake before tax day is extremely helpful. (Tax Day is generally April 15, but is April 18 in 2023.)

2.) Correct your tax forms

If you can catch the problem before tax day and before you file your taxes, you can get a corrected W-2 to use. If you didn’t catch it early enough, you’ll still follow these steps, but you’ll need to file an amended tax return.

3.) Pay tax on the excess contribution

Your employer will return the excess money to you as well as any funds the money has earned. You will owe tax on this amount and perhaps an early withdrawal penalty – more on that below.

Tell your employer or plan administrator and they will correct the situation by returning your money and correcting your tax forms. Then you need to correct your tax papers and payments on your side.

What are the penalties?

In addition to stress and irritation, the penalties for overcontribution can include problems with your tax return, additional taxes and penalties.

If you can correct the mistake before the tax day deadline, the fallout is relatively small. You must file your taxes using the updated W-2, and you must pay taxes on the excess contribution as if it were wages.

Think of it this way: If you hadn’t contributed too much, that money would have come to you via your regular paycheck, so even if it comes late, it’s taxed as if it was.

However, if you miss the deadline, you will owe these additional taxes and may have to pay a 10% early withdrawal penalty. Then you owe additional tax again – yes, once for the tax year in which you made the mistake and again in the year in which it was corrected.

Why do overpayments occur?

Usually, overcontribution occurs because you have two sources of retirement savings and don’t keep track. If you have the same employer and retirement account for an entire tax year, your employer or plan administrator is more likely to catch the mistake.

If you change jobs and have two 401(k)s, but only briefly, problems can arise. This can also happen when you work multiple jobs and have 401(k) plans associated with each, so make sure you keep track of any 401(k) plans you may have.

Another common stumbling block is when you get a significant raise or bonus and forget that your 401(k) is set to take a fixed percentage of your paycheck. If you calculate based on your previous, normal salary, you may be well within your limits, but with a bigger paycheck comes a bigger 401(k) deferral.

Bottom line

SmartAsset: What to Do When You Overcontribute to Your 401(k)

SmartAsset: What to Do When You Overcontribute to Your 401(k)

When taxes come into play, finances can get complicated. And pension savings are no exception. If you believe you have overcontributed to your 401(k) plan, do not hesitate to contact your employer or plan administrator. And when you’re in the middle of tax season, you want to have that situation rectified right away before tax day. Or you may be dealing with fines.

Tips for managing your pension savings

  • Saving for retirement is a lot easier said than done, but a financial advisor can get you on the right track. SmartAsset’s free tool matches you with up to three vetted financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • A 401(k) isn’t the only place you can save for retirement. An individual retirement account, or IRA, is another option. It has a contribution limit of $6,500 for 2023 and offers the same tax advantages as a 401(k). Roth IRAs, on the other hand, don’t provide an upfront tax credit, but you don’t have to pay taxes on your income when you retire.

  • If you take advantage of employer 401(k) matching, SmartAsset’s 401(k) calculator can help you figure out how much you want based on your annual contribution and your employer’s matches.

Photo credit: ©iStock.com/AndreyPopov, ©iStock.com/jygallery, ©iStock.com/Cn0ra

The post What to Do When You Overcontribute to Your 401(k) appeared first on the SmartAsset Blog.

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