What Is an Overcontribution?
The term overcontribution refers to any amount that a taxpayer contributes to a tax-deductible retirement plan that exceeds the maximum allowable contribution for a given period. Contribution limits are determined and regularly adjusted by a retirement plan's registrar or the Internal Revenue Service (IRS). Overcontributing to your retirement plan can trigger penalties if taxpayers don't deal with the excess amounts within a certain period of time.
Key Takeaways
- An overcontribution is any amount that someone sets aside to a tax-deductible retirement plan that exceeds the maximum allowable contribution for a given period.
- The IRS imposes a 6% penalty for each year that any excess amount contributed remains in a retirement account until it is rectified.
- Taxpayers can withdraw the excess and related earnings or apply it to a future year's contribution.
- Plan holders should notify the plan administrator or their employer to begin fixing the problem.
- Employer-sponsored plans require that amended W-2 forms be issued to employees.
Understanding Overcontribution
The IRS sets limits on how much taxpayers can invest each year in their retirement savings accounts. The agency imposes different limits for different plans and adjusts them annually for inflation. For instance, individual taxpayers can contribute a maximum of:
- $22,500 in 2023 ($23,000 in 2024) to a 401(k), 403(b), or profit-sharing plan. People 50 and older can make an additional catch-up contribution of $7,500 in 2023 and 2024.
- $6,500 in 2023 ($7,000 in 2024) to an individual retirement account (IRA) with an additional $1,000 per year for those 50 and older.
- $66,000 in 2023 ($69,000 in 2024) to a Simplified Employee Pension (SEP) IRA
- $15,500 in 2023 ($16,000 in 2024) to a SIMPLE IRA
Although it's important to max out your contribution limits, don't go overboard. Any amount you invest in these accounts above the limits is considered overcontributions. As such, they're ineligible for any tax breaks you may receive—like those associated with IRAs, which reduce your tax bill. In fact, overcontributions run the risk of costing you more money in the tax year they're made.
The IRS imposes a 6% penalty on the amount of the excess every year until you fix the situation. And any excess contributions made toward an IRA cannot be used to reduce your taxable income. Here's what you can do to fix the situation:
- You have until the tax filing deadline of that year (generally April 15) to withdraw the excess and any related earnings. The earnings on that excess must be reported as income on your tax return.
- You may apply the excess to the following year's contribution limit. But this means that you'll have to pay the 6% penalty in the current year.
The limits to employer-sponsored plans like a 401(k) only apply to employee contributions, such as those made through payroll deductions. Any matches from employers do not count toward overcontributions.
Special Considerations
Be sure you notify your plan administrator or employer if you breach the IRS limit for your 401(k), 403(b), IRA, or any other kind of retirement account. The earlier you make the notification the year after the overcontribution, the better. It’s up to the plan administrator to return any excess payments to employees (in the case of an employer-sponsored plan), as well as any earnings on the excess contributions.
Sending this notification as early as possible provides plan administrators enough time to do the necessary paperwork—especially when the plans are held through an employer. This typically includes adjusting any contributions that came out of employees' checks on a pretax basis and counting them as wages on employees' W-2 forms. This allows employees enough time to issue new forms before the annual tax filing deadline.
Risks of Overcontribution
As noted above, it's important to correct overcontributions quickly. Otherwise, tax trouble often ensues. If the excess amount is not returned to affected employees in enough time to file taxes, employees run the risk of double taxation. That is, they could pay taxes in the year the excess occurred, and still need to pay the following year, as well.
To avoid double taxation, some employees can file an amended return with the excess contribution taken out, plus any related earnings from the overcontribution. This must be done by the due date for tax returns in April.
Overcontributions to IRAs are a bit easier to correct but they still result in penalties. Those who overcontribute to an IRA can leave their accounts alone and designate any overcontribution toward next year’s limit. Remember, that a 6% penalty applies on any excess per year. Of course, any individual contributions must be adjusted going forward to keep from again creating an overcontribution the following year.
How Do You Handle a 401(k) Overcontribution?
If you've overcontributed to your 401(k) account, contact your plan administrator and notify them of the overcontribution. Try and do this before the annual tax-filing deadline. Your plan administrator will then return the amount and adjust the earnings.
What Happens If I Overcontribute to My IRA?
If you overcontribute to your IRA, you will have to pay a 6% penalty every year on the additional amount until it is corrected.
How Much Money Can You Roll Over Into an IRA?
The IRA contribution limit does not apply to rollovers. For example, if you have a 401(k) from an old job you can rollover the entire account into an IRA.
FAQs
If you've contributed too much to an IRA, fix it before filing taxes
- Contact your plan administrator. ...
- Withdraw the excess contribution and earnings from the IRA. ...
- Pay taxes on any earnings.
What to Do if You've Overcontributed
- 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.
Key Takeaways
An overcontribution is any amount that someone sets aside to a tax-deductible retirement plan that exceeds the maximum allowable contribution for a given period. The IRS imposes a 6% penalty for each year that any excess amount contributed remains in a retirement account until it is rectified.
What does excess contribution mean? ›
Contributing more to your health savings account (HSA) than the IRS limit for the tax year creates excess contributions. All excess contributions are subject to income tax and a 6% excise tax each year until corrected. For the current annual IRS limits see Section D question #1 of the HSA FAQs.
How does IRS know if you over contribute to IRA? ›
The IRS requires the 1099-R for excess contributions to be created in the year the excess contribution is removed the from your traditional or Roth IRA. Box 7 of the 1099-R will report whether you removed a contribution that was deposited in the current or prior year for timely return of excess requests.
What happens if I exceed my IRA contribution limits? ›
Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. The tax can't be more than 6% of the combined value of all your IRAs as of the end of the tax year.
How do I report excess contribution withdrawals? ›
You will need to include Form 5329 with your filing to reflect that the withdrawn contributions are no longer treated as having been contributed. If the excess generated any earnings, you'll need to remove them and include them in your gross income.
How do I correct excess 401K contributions on TurboTax? ›
Crazy situation with excess 401K contribution
- Sign in to TurboTax and open or continue your return.
- Go to Wages & Income under Federal.
- Under Less Common Income, select Start or Revisit next to Miscellaneous Income, 1099-A, 1099-C.
- Select Start next to Other income not already reported on a Form W-2 or Form 1099.
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.
Can I contribute 100% of my salary to my 401k? ›
401(k) contribution limits 2024
For 2024, those 401(k) contribution limit is $23,000, and $30,500 for those 50 and older due to catch-up contributions. $23,000. $7,500. Cannot exceed the lesser of $69,000 or 100% of employee compensation, whichever is less.
Depending on the company you work for, your plan may automatically stop your contributions when you hit the limit. They may have measures in place to prevent you from setting your contribution amount too high or stop more money from going into your 401(k) once you've contributed the maximum.
Can a 401k be maxed out? ›
Maximum Limits
If you're under the age of 50, the maximum amount that you can contribute to a 401(k) is $22,500 in 2023 and $23,000 in 2024.
What is an example of excess contribution? ›
For example, you made a $6,000 Roth IRA contribution but only qualified to make a $5,000 contribution. The $1,000 excess would not be taxed and penalized because it wasn't more than the annual contribution limit. However, if you made an $8,000 contribution but your limit was $7,000 you would have an excess of $1,000.
What is the penalty for over contribution? ›
Be aware you'll have to pay a 6% penalty each year for every year the excess amounts stay in the IRA. The tax can't be more than 6% of the total value of all your IRAs at the end of the tax year. Consult a tax advisor to discuss how this applies to you.
How does an excess 401k plan work? ›
Excess benefit 401(k) plans provide supplemental retirement income to employees who are limited in what they can contribute to, or receive from, a 401(k) plan. This is primarily due to various tax law limits that apply to qualified plans.
Can you change your IRA contribution at any time? ›
A Roth IRA contribution can be partially or wholly recharacterized as a traditional IRA contribution, as long as you recharacterize the contribution by October 15 of the year following the year in which you need to make the adjustment.
Can I cancel a traditional IRA contribution? ›
You can dissolve an IRA at any time and for any reason. But doing so does come with certain financial repercussions. If you do so, you may be subject to fines and penalties. This may include early withdrawal penalties (if you dissolve it before you retire) and an early close-out fee.
What is the excess IRA contribution form 5329? ›
Form 5329 is used to calculate and report these penalties. Excess contributions. If a taxpayer contributes more than the allowed amount to certain tax-advantaged accounts, such as an IRA, they may need to report and pay additional taxes using this form. Missed required minimum distributions.
How do I correct an excess contribution to my Roth IRA fidelity? ›
Go to Fidelity.com or call 800-343-3548. Use this form to request a return of an excess contribution made to your Traditional, Rollover, or Roth IRA; or an excess direct rollover to an Inherited IRA or Inherited Roth IRA.
