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 In fact, excess contributions are double-taxed: once in the contribution year, and again when they're withdrawn.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-contributedto 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).
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 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 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 circ*mstances, 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.
FAQs
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.
What to do if you exceed 401k contribution limits? ›
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.
What happens if you go over your 401 K contribution? ›
You'll end up paying taxes twice on the amount over the limit, as well as the 10% early distribution tax if under 59.5 years old, if the 401(k) overcontribution isn't paid back in time. The funds should be returned to you by the tax-filing deadline, generally around mid-April.
What should I do after I max out my 401k? ›
Key Takeaways
- Your first step is likely a traditional or Roth IRA.
- Next, look at various strategic investments, which vary in risk, from bonds to variable annuities.
- Also consider alternative options, such as real estate, HSAs, and investing in a business.
If you're a plan sponsor, there are several reasons why you might need to make adjustments to wages or taxes on a payroll record. However, it's important to understand that per IRS guidelines, once contributions are made into a 401(k) plan, they can rarely be reversed, even when adjustments are made within payroll.
How do I correct an excess 401 K contribution? ›
Here are some steps to take:
- Contact Your Employer or Plan Administrator Immediately. Let your employer know that you've overcontributed. ...
- 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. ...
- Pay Taxes on the Excess Contribution.
Contributions to a 401(k) plan are capped annually by the IRS, with limits for 2024 set at $23,000 (and an additional catch-up contribution of $7,500 for those over age 50). Typically, once you reach this limit, your payroll system will automatically halt additional contributions so that you don't exceed the limit.
What happens if I contribute too much to 401k fidelity? ›
If you contribute too much to your 401(k), you may incur costly penalties—to the tune of a 10% fine plus any unpaid income taxes on the excess contributions when you finally take them out. Excess contributions can be reported on Form 1099-R when you file taxes.
How to report excess 401k contribution turbotax? ›
You must include the excess deferral in your wages in the year the excess deferral happened. On the "Any Other Earned Income" screen enter "2023 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".
What is the corrective distribution of excess contributions? ›
Corrective Distribution of Excess Contributions. Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess can be corrected. The excess is distributed to you by the plan (along with any income earned on the excess).
Assuming the stock market's average annual rate of return (11%), you could have more than $5 million in your 401(k) if you max out your contributions every year from age 30 to 60. And the vast majority of that money ($4.5 million) is all compound growth.
Is it realistic to max out 401k? ›
Maxing out a 401(k) is not a realistic goal for everyone. If you make $50,000 a year, contributing the maximum would leave you with $30,500 to live on. That could be challenging, especially if you live in a city with a higher cost of living, have debt you're paying off or are pursuing multiple goals.
What happens to the employer match if you max out your 401k? ›
If you max out your 401(k) early in the year, you could miss part of your employer match, experts say. But some 401(k) plans offer a “true-up,” or additional deposit of the remaining employer match if you max out contributions before year-end.
What happens if you accidentally contribute too much to a 401k? ›
Your employer will issue a 1099-R reporting your excess deferral in the year you over-contributed. You'll need to file an amended tax return and pay any additional taxes owed. Additionally, you'll pay taxes on the withdrawal in the year you take it out, and you may owe a 10% early withdrawal penalty.
Can 401k contributions be refunded? ›
If you were auto-enrolled in a Guideline 401(k), it is possible to get a refund of contributions in some scenarios.
Can I adjust my 401k contribution? ›
Government regulations allow employees to adjust their 401(k) contributions at least quarterly, but many companies permit changes at any time. Employees can change their contribution amount multiple times each year, but the exact frequency depends on their company's retirement plan guidelines.
What happens when you hit your max 401k contribution limit? ›
If you exceed these limits, then you may be eligible to receive a refund of the additional funds, taking into account any gains or losses incurred. Unfortunately, if your employer offers a match, any match as a result of the excess will be forfeited.
How to report excess 401k contribution on tax return turbotax? ›
You must include the excess deferral in your wages in the year the excess deferral happened. On the "Any Other Earned Income" screen enter "2023 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".
What happens if you can't max out 401k? ›
Contribute To Get Your Maximum Employer Match
Even if you can't max out your 401(k) plan, you should strive to get your full employer match. This is the closest thing to free money that you'll find in the investment world, and it can pay huge dividends when it comes to building a sufficient retirement nest egg.
