If you contribute more than the annual limit to your 401(k) plan, the excess amount will be subject to income tax and a 10% penalty. The limit for 2023 is $22,500 ($30,000 if you’re age 50 or older). If you make Roth 401(k) contributions, the limit is the same, but the contributions are made on an after-tax basis, meaning you won’t pay income tax on the money when you withdraw it. However, you may be subject to the 10% penalty if you withdraw the money before you reach age 59½. There are some exceptions to the 401(k) contribution limits, such as if you’re a member of the military or if you have a high-deductible health plan.
## 401k Plan Limits
401k plans are tax-advantaged retirement savings accounts that allow you to save money for retirement on a pre-tax basis.
The amount of money you can contribute to your 401k plan is limited each year. For 2023, the contribution limit is $22,500 ($30,000 for those age 50 or older).
### What Happens If You Exceed the 401k Limit?
- Excess Contributions: Any contributions that exceed the limit are called excess contributions.
- Tax on Excess Contributions: Excess contributions are subject to a 6% tax each year they remain in your account.
- Deadline for Removing Excess Contributions: You have until the tax filing deadline (including extensions) to remove excess contributions.
If you exceed the 401k limit, it’s important to take the following steps:
- Contact Your Plan Administrator: Report the excess contribution and request a distribution.
- Withdraw Excess Contribution: Withdraw the excess amount by the tax filing deadline.
- Pay Tax on Excess Contribution: If you withdraw the excess contribution after the tax filing deadline, you’ll need to pay a 6% tax on the excess amount for each year it remained in your account.
| Year | Contribution Limit | Catch-Up Contribution (Age 50+) |
|---|---|---|
| 2023 | $22,500 | $30,000 |
| 2022 | $20,500 | $27,000 |
| 2021 | $19,500 | $26,000 |
Excess Contributions
If you contribute more than the annual limit to your 401(k) plan, the excess contributions will be subject to a 6% excise tax each year that the excess remains in the plan. For example, if you contribute $25,000 to your 401(k) plan in 2023, but the annual limit is $22,500, you will have to pay a 6% excise tax on the excess $2,500, which is $150. The excise tax will continue to apply each year that the excess contributions remain in the plan.
There are several ways to avoid making excess contributions to your 401(k) plan:
- Check your contribution limits. The annual contribution limit for 401(k) plans is $22,500 in 2023. If you are 50 or older, you can make catch-up contributions of up to $7,500 in 2023.
- Keep track of your contributions. You can check your 401(k) account statement to see how much you have contributed so far this year.
- Make estimated tax payments. If you expect to exceed the annual contribution limit, you can make estimated tax payments to the IRS. This will help to reduce the amount of taxes you owe on the excess contributions.
If you do make excess contributions to your 401(k) plan, you can take the following steps to correct the mistake:
- Withdraw the excess contributions. You can withdraw the excess contributions without paying any taxes or penalties. However, you will have to pay income tax on the earnings on the excess contributions.
- Recharacterize the excess contributions. You can recharacterize the excess contributions as traditional IRA contributions. This will avoid the 6% excise tax, but you will have to pay income tax on the earnings on the excess contributions when you withdraw them from your IRA.
- Roll over the excess contributions. You can roll over the excess contributions to another 401(k) plan or to an IRA. This will avoid the 6% excise tax, but you will have to pay income tax on the earnings on the excess contributions when you withdraw them from your new plan or IRA.
| Option | Tax implications | Penalty |
|---|---|---|
| Withdraw the excess contributions | Income tax on earnings | None |
| Recharacterize the excess contributions | Income tax on earnings | None |
| Roll over the excess contributions | Income tax on earnings when withdrawn | None |
Tax Consequences of Exceeding 401k Limits
Contributing more than the annual limit to your 401k can result in tax penalties. The excess contributions are subject to a 6% excise tax each year they remain in the account. Additionally, any earnings on the excess contributions are also subject to the excise tax.
For example, if you contribute $1,000 over the limit in 2023, you will owe a $60 excise tax for that year. If the excess contribution earns $100 in interest, you will also owe $6 in excise tax on the interest.
The excise tax is in addition to any regular income tax you may owe on the excess contributions. If you withdraw the excess contributions within six months, you will avoid the excise tax but will still owe income tax on the earnings.
If you are under age 59½, you will also pay a 10% early withdrawal penalty on the excess contributions and earnings if you withdraw them within five years of making the excess contribution.
To avoid the excise tax and early withdrawal penalty, it is important to contribute only up to the annual limit for your 401k. If you do exceed the limit, you should withdraw the excess contributions as soon as possible.
- The annual limit for 401k contributions is $22,500 for 2023, plus an additional $7,500 catch-up contribution for those aged 50 or older.
- The excise tax rate is 6% per year on the excess contributions and earnings.
- If you withdraw the excess contributions within six months, you will avoid the excise tax but will still owe income tax on the earnings.
- If you are under age 59½, you will also pay a 10% early withdrawal penalty on the excess contributions and earnings if you withdraw them within five years of making the excess contribution.
| Excess Contribution Amount | Excise Tax | Income Tax | Early Withdrawal Penalty |
|—|—|—|—|
| $1,000 | $60 | $0 | $0 |
| $5,000 | $300 | $1,000 | $0 |
| $10,000 | $600 | $2,000 | $1,000 |
401(k) Contribution Limit Exceeded: Understanding Your Options
If you contribute more than the allowable limit to your 401(k) plan, you’ll face potential consequences. Here are the actions you can take to resolve the situation:
Repayment Options
- Voluntary Correction: You can withdraw the excess contributions within 6 months of the end of the tax year (April 15th of the following year). Earnings on the excess must also be withdrawn.
- Employer Withdrawal: If you don’t withdraw the excess voluntarily, the plan administrator will distribute it to you, along with any earnings. You’ll owe income tax and a 10% penalty on the earnings.
To avoid future 401(k) contribution limit issues, consider the following:
- Monitor your contributions throughout the year.
- Work with your employer to ensure accurate payroll deductions.
- Review your 401(k) statements regularly.
If you’re unsure about your 401(k) contributions or repayment options, consult with a financial advisor for guidance.
401(k) Contribution Limits
| Year | Employee Contribution Limit | Employer Contribution Limit (Including Safe Harbor) |
|---|---|---|
| 2023 | $22,500 | $66,000/$73,500 (with catch-up contributions) |
| 2024 | $23,500 (estimated) | $69,500 (estimated) /$77,500 (with catch-up contributions)
Note: Catch-up contributions are available to participants who are 50 or older. Welp, there you have it, folks! If you’ve stumbled upon this article, you’re either a 401(k) rockstar or just a bit curious about the limits. Either way, I hope you found the info you were looking for. Remember, knowledge is power, especially when it comes to saving for your future. So keep on learning, keep on saving, and I’ll catch you on the flip side for more financial adventures. Cheers! |