What Happens When You Contribute More Than the Maximum Allowed in Your 401(k)?

by Herb Kirchhoff, studioD

The Internal Revenue Service’s rules for 401(k) tax-deferred, employer-sponsored retirement plans set maximum annual limits on the amount that you can contribute to these plans. The limits apply collectively to all your 401(k) plans, not to each plan individually. If you exceed 401(k) contribution limits, you should take steps to come back into compliance.

Contribution Limits

For 2012, the annual limit on elective tax-deferred employee 401(k) contributions waS $17,000 for taxpayers under age 50. Those 50 or older could contribute an additional $5,500, bringing their limit up to $22,500. When you have only one 401(k) plan, the plan administrator will tell you to stop contributions when you reach the limit. But because the contribution limit applies collectively to all your 401(k) plans, it’s possible to over-contribute when you have plans with multiple employers or multiple plans with the same employer.

Taxation Doubled

If you don’t take action to correct the excess contribution situation, you will be taxed twice on the money. An excess contribution is not tax-deferred, so it will be taxed in the year it is contributed and taxed again when you withdraw it from the 401(k) during retirement. If you discover you have put too much into your 401(k), contact your employer or plan administrator to have the excess returned to you.

Action Deadline

You must request return of excess contributions in time to have the money paid back to you by April 15 of the year following the year in which you made the excess contribution. For example, if you contribute too much to your 401(k) in 2012, you must request that the excess be returned to you by April 15, 2013. The plan administrator also will return any earnings on the excess contribution. If you have multiple 401(k) plans, you can retrieve the total of your excess contributions from one plan and leave the others untouched.

Tax Consequences

In the 2012 contribution example, if you withdraw an excess contribution by April 15, 2013, you add that amount to your other taxable 2012 income. But the earnings on the excess contribution become part of your taxable 2013 income. This “corrective distribution” and related earnings will be reported to you and the IRS on Form 1099-R. While you will owe income tax on the corrective distribution and related earnings, they won’t be subject to the 10 percent penalty on early 401(k)withdrawals.

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About the Author

Herb Kirchhoff has more than three decades of hands-on experience as an avid garden hobbyist and home handyman. Since retiring from the news business in 2008, Kirchhoff takes care of a 12-acre rural Michigan lakefront property and applies his experience to his vegetable and flower gardens and home repair and renovation projects.

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