Surprise! You can Actually Over-Contribute to a 401K
All good things come with limitations. And never is that more true than with retirement accounts. For those lucky enough to have an employer-sponsored 401K (it is rarer that you think), you are probably aware that there is a maximum 401K contribution limit that you can contribute against each year, as determined by the IRS. This limit is documented in section 402(g) of the tax code. For 2024, that maximum is $23,000 for those under 50 years old, and an additional $7,500 “catch-up contribution” for those age 50+ across all accounts (all accounts refers to a “coordination of benefits” across all similar type accounts). The max employer 401K contribution is even higher.
What if you Over-Contribute to a 401K?
If you only have one 401K plan during a calendar year, it is very unlikely that you will ever make an excessive deferral, or over-contribute to your 401K. You don’t have to worry about calculating the precise dollar or percentage amount to perfectly nail that 401K maximum on your last paycheck of the year (or promptly cut off 401K contributions, if you max out sooner).
Your 401K plan administrator (the investment brokerage that houses your 401K account) will know what the maximum contribution is for the year and limit your contributions to that amount. If they don’t, contact them to make the correction immediately.
There is a second, much more likely scenario, that might lead you to over-contributing to a 401K: multiple 401K plans from two or more employers in a calendar year. There are two ways in which this could occur:
- You accidentally contribute a sum to multiple plans that is greater than the maximum annual 401K limit.
- You purposefully contribute a sum to multiple plans that is greater than the maximum annual 401K limit. ;-)
Theoretically, you should tell your new employer how much you previously contributed to other 401K plans for the year when you start employment so that they can cap your contributions to not go over the annual maximum. However, that might not be the smartest move. In fact, if your new employer has a better 401K match, it can be a very costly mistake. Let me illustrate why through a painful personal lesson…
Back in June of 2007, I made the move to join my current employer. At the time, I was absolutely thrilled to learn that they offered 401K matching of 50% of my contribution, up to the IRS maximum (which was $15,500 at the time). Unfortunately, I had already contributed the maximum contribution for the year at my previous employer – who matched roughly $1,000 for the year. Little did I know that I’d be leaving my previous employer mid-year and that my new employer would have such an amazing (and superior) matching 401K benefit.
I thought to myself,
Damn, in a way I have inadvertently punished myself for good behavior and missed out on almost $7,000 in additional matching funds from my new employer! If I had only known, I wouldn’t have contributed in the first place!
What I know now that I didn’t know then, is that it didn’t have to be that way. I could have purposefully over-contributed against the IRS maximum by adding additional funds to my new 401K, and then withdrawn the funds from my previous employer’s lesser-matching 401K at the end of the year!
Not knowing this one simple 401K hack literally cost me $7,000 in free money. They say ignorance is bliss, but when it comes to personal finance, I wholeheartedly disagree. Hopefully, in sharing this story, I will prevent you from making the same ignorant mistake.
How to Correct an Over-Contribution to a 401K
There are a few steps that you need to follow or you could end up paying penalties to the IRS.
- Don’t roll over your old 401K. Keep the funds where they are until you have remedied.
- As soon as you get your W2 forms from your new and previous employers, send a copy of both in to the administrator of the plan that has the lesser 401K match that you would like to withdraw funds from. The letter should state that you have made an excessive deferral and would like to withdraw $XX amount of contributed funds ASAP. Send this as soon as you get the W2’s – most administrators require receipt of this paperwork by March 1st for the previous calendar year’s contributions. Make copies of everything!
- Finish everything by the tax deadline in order to avoid penalty from the IRS.
- Your administrator should send you a check for the withdrawn funds and any investment returns. They will also send you 1099-R forms for the contributions (calendar year contributed) and earnings (calendar year distributed), as they are considered income.
If you are considering doing this, also read up on the IRS documentation on 401K contributions over the limit. The following sections should be of particular interest:
Timely withdrawal of excess contributions by April 15
- Excess deferrals withdrawn by April 15 of the year following the year of deferral are taxable in the calendar year deferred.
- Earnings are taxable in the year they’re distributed.
- There is no 10% early distribution tax, no 20% withholding and no spousal consent requirement on amounts timely distributed.
Consequences of a late distribution (after April 15)
- Under IRC Section 401(a)(30), if the excess deferrals aren’t withdrawn by April 15, each affected plan of the employer is subject to disqualification and would need to go through EPCRS.
- Under EPCRS, these excess deferrals are still subject to double taxation; that is, they’re taxed both in the year contributed to and in the year distributed from the plan.
- These late distributions could also be subject to the 10% early distribution tax, 20% withholding and spousal consent requirements.
Definitely confirm everything with a tax advisor and your 401K administrator before making any moves.
What if you Want to Contribute More to a 401K than the IRS Allows?
If you want to contribute more than 401Ks allow, you have some options to look into further (eligibility varies based on income and other factors):
- 457B Plans: certain types of employers (e.g. non-profits and government) do not have a coordination of benefits between their 401K/403B and 457B plans, allowing you to effectively double the defined contributions that a 401K/403B offers.
- Traditional and Roth IRA Plans: if your income level allows, Traditional IRA and Roth IRAs are a great additional retirement account option.
- SEP IRA and SIMPLE IRA: if you have 1099 income, SEP IRAs and SIMPLE IRAs are great self-employed retirement plans that will allow you to boost your retirement contributions. Take a look at Solo 401Ks as well.
- HSA: while HSA funds are supposed to be for qualified medical expenses, they also can be withdrawn for anything starting at age 65. It’s one of the reasons why they are a pick for the best retirement account vehicles.
Happy contributing!
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Interesting! I don’t think I’ll ever have the problem of having over-contributed, but it’s nice to think about. (haha)
Good points. I don’t contribute the maximum but I certainly would if it were 50% up to the maximum. That’s what, $9000/yr to anybody?
Certainly unusual. I’ve always gotten 6%.
I had no clue that 401k hack existed! Sucks that you missed that opportunity, but it provided a great learning experience and now you’re able to share it with us.
It’s a shame that many folks don’t take advantage of their 401ks as they should. My company just announced they’d be automatically enrolling people in the 401k plan and they had to opt out if they didn’t want to be a part of it. Afterwards, our participation rate increased to something like 93%.
Still, I can’t believe there are 7% of employees who are not dropping a dollar into their 401k, especially being that we match dollar for dollar at 4%!
This statement is not true in all scenarios:
“You don’t have to worry about calculating the precise dollar or percentage amount to perfectly nail that 401K maximum on your last paycheck of the year (or promptly cut off 401K contributions, if you max out sooner).”
If your employer match truly is a match and CONDITIONAL upon your contribution, then it is necessary that you continue to contribute each month the minimum necessary to receive the full match for the entire year. Otherwise, hitting the yearly maximum early in the year, in June for for example, would result in loss of the employer match from July-December.
Yeah, that’s a good clarification. I can’t believe there are still plans like that out there.
“I can’t believe there are still plans like that out there.”
Really? Are you implying that the plan you participate in is not conditional on your contribution? If you contributed “$0”, wouldn’t you get 50% of $0?
While I’ve experienced exceptions, most of my employers only contributed if you contributed yourself (IOW, a true match). Is that not how your plan works?
I get 50% of what I contribute, up to the maximum IRS amount. I could max out in February or December, it doesn’t matter – employer matches 50%, when I contribute. And it’s vested immediately.
It should not matter when during the year you contribute, in my opinion. And many companies run it that way. But some employers still do not do it that way.
Some companies do a true-up early the following year for this scenario.
I appreciate your advice! I am now where you were in the middle of 2007 – my new employer has a much better match. If I withdraw from my old employer’s 401(k), does the plan administrator return the match to the company as well? Or does that stay in my 401(k)? Thanks!
i have the exact same situation. What happens to the previous employer match if I withdraw from my previous plan?
This is a great article. I’m in a similar situation.
Maxed out with old employer, then lost job. Old employer does not contribute until end of calendar year, so I’ve not nothing from them for 2016.
Luckily found new job with employer that contributes 50%, but only if I contribute earnings from their job. That’s $9K, but I need to contribute excess $18K to get this $9K.
I’d love to withdraw excess $18K from old employer. However, old employer’s benefits department is tough to deal with.
Does the approach the author of the blog recommended only work after W2s are available? How about informing the old plan administrator in the year of the excess contribution?
I am having a similar problem that the old employer’s benefits department is tough to deal with. Isn’t it my choice whether I withdraw excess contributions from the old OR the new employer? The old one doesn’t want to do it telling me to go to the new employer for excess removal. Is there a law I can show them that I have a choice in this matter
Exactly my situation. An answer to this would be much appreciated.
Solved:
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-what-happens-when-an-employee-has-elective-deferrals-in-excess-of-the-limits
I also checked my old plan’s “Plan Description” document and it stated that if I had multiple plans I can choose which plan I withdraw from.
My advice: login to your old plan, locate the Plan Description document (or Plan Rules, etc.), ctrl+c the excess contributions section (where it likely states something similar to mine), ctrl+v to an email addressed to your plan administrator, and send.
If you can’t find your old plans documentation stating that, then just send the IRS link.
I had a similar situation for 2017 where I had contributed a significant amount early in the year with my first employer and then switched jobs to an employer that matched 50%. I hadn’t read this article, but came to the same conclusion (that I could over-contribute then request the excess deferral from the first employer). I tried to do this once my W2’s arrived, but the first company informed me that they would not process the deferral as the over-contribution did not happen while I was employed by them. I asked Fidelity about it and they said it is up to the company whether or not they will do it. In the end I had to get the excess deferral from my second company, which means I lost a significant chunk of change when they reverted the match. The above IRS link states “be paid out of any of the plans that permit these distributions”. I think that is a bit vague, but it implies that they don’t have to permit the distribution. I made a few phone calls and tried to push them to process the excess deferral but they refused. I’m not sure what it states in their plan description but it is too late for me now. Ultimately for me it means an additional headache when filing my taxes, and I didn’t get the extra match I was hoping for.
I’m in a similar situation. I just realized I contributed $18K to my new employer’s (started beginning of April) 401k plan but had been contributing to my old employers plan up until I left (so had contributions from Jan-Apr 2016). I called the new 401k company to find out my options and they said I would need to get the amount I paid in the old and they would send me a check for that amount. Because I rolled my old plan into the new – I am not able to take advantage of the loophole, correct? My new company has a better matching policy.
I have twist on this – my current company ‘A’ offers a 401K and I participate. In 2017 I will work at company A on a very limited basis (little earned income), In 2017 I will work and generate significant earned income from company B, which does not offer a 401K plan. Therefore I would like to participate in a self directed IRA based on my earned income from company B. HOWEVER, I did some work at company A at the start of 2017 and generated a contribution to the 401K plan. This participation will disallow participation in a self directed, pre-tax IRA. Can I have company A treat my 2017 401K contribution like an ‘over-contribution’? The ultimate goal is to reverse the contribution and show now participation in a sponsored 401K plan for 20217 (box 12 w-2). Thanks
Man I could really use some help in understanding this. I also overcontributed due to working for 2 employers. I am doing my taxes now and trying to understand how this works as both employer plans are relatively the same in matching contributions but both only match contributions up 6%.
Question 1: If I was contributing over 6% per pay period does ANY of the money my employer contributed also get taken out of my account?
Question 2: If my spouse did not reach their maximum is there any way to justify or take advantage of that? Looking for an easier way than contacting either of my employers and going through the difficulties this will present.
CMB Q1 – If in summing up your contributions in 2017 you have gone over the allowable limit ($18K for aged under 50), you can 1) correct the mistake by requesting the excess be refunded, plus earnings, before April 15, or 2) if the mistake is not corrected you must report the excess as income on your tax return forms for 2017 and as well as on your tax return for the calendar year when the excess amounts are withdrawn.
Q2 – you cannot ‘share’ your wife’s ‘unused’ contribution eligibility,
My company (or their payroll processor, or the 401K company) recently
overcontributed to my (only) 401K account. I notified my company immediately, but
whoever is responsible hasn’t corrected the problem yet. My question is, since I’m
over 50, can this be considered a “catch-up” contribution? My plan states that catch-up contributions are to be made by a special election, but I don’t know if the IRS cares how the money was contributed.
Even better (this is what I was told by my administrator) – regardless of how many employers you have:
1. Purposely overcontribute (e.f., in Dec., kick in an extra $10k)
2. On Jan 1, transfer 100% of your $$$ into the fund that had the best return for the year (say, an increase of 50%).
3. On Jan 2, request a return of your excess contribution.
(the admin will not return $10k. Instead, the admin will use the fund where your $$$ are at the time of the request, and will return amount will be calculated as if you had contributed the monies equally over 52 weeks.
4. Result – you will get a check for $15k, for an ROI of 50% over 30-60 days.