Author Topic: What happens if you exceed your 401k contribution limit?  (Read 10974 times)

neo von retorch

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What happens if you exceed your 401k contribution limit?
« on: December 01, 2014, 10:09:49 AM »
My contribution options are whole number percentages of my income. So I'm either under the $18000 limit for 2015, or a few hundred dollars over.

I can probably set a reminder and change my percentage for the final paycheck of 2015 so that it's less, and get much closer to $18000, but I'm curious - what happens if I"m over? Do I just pay normal tax on that extra? Or are there steeper penalties?

COlady

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Re: What happens if you exceed your 401k contribution limit?
« Reply #1 on: December 01, 2014, 10:12:37 AM »
I don't know what the penalty is but your employer should just stop your contribution at the maximum.

Cheddar Stacker

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Re: What happens if you exceed your 401k contribution limit?
« Reply #2 on: December 01, 2014, 10:15:48 AM »
Employer should limit contributions. If they don't you will get a 1099-r to report excess deferrals on your income tax return. No penalties, but you pay tax on any overages since they were deducted from taxable wages.

minimustache1985

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Re: What happens if you exceed your 401k contribution limit?
« Reply #3 on: December 01, 2014, 10:37:28 AM »
Find out from your plan provider, since there are multiple ways they might handle it.  My last employer did whole % options as well, and at if you maxed they continued taking it out but taxed it (not Roth contributions, but after-tax contributions).  Other companies will max you at the limit and not take a penny more out of your check, and it sounds like still others will leave it to you to report excess deferrals and pay the taxes on it with your return.

ThermionicScott

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Re: What happens if you exceed your 401k contribution limit?
« Reply #4 on: December 01, 2014, 10:43:57 AM »
So you're already in danger of over-contributing for next year?  Good problem to have.  :^)

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zinnie

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Re: What happens if you exceed your 401k contribution limit?
« Reply #5 on: December 01, 2014, 12:42:41 PM »
As others have said, most companies will cut you off at the limit. When I started where I work not I called to ask about this and they said they'd tax it, but it turned out that for that last check they only took out the amount to make it exactly to the limit.

ruthiegirl

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Re: What happens if you exceed your 401k contribution limit?
« Reply #6 on: December 01, 2014, 12:49:12 PM »
This happened to us last year.  The university just reduced December's contribution and we hit the $17,500 limit.

catccc

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Re: What happens if you exceed your 401k contribution limit?
« Reply #7 on: December 01, 2014, 01:05:34 PM »
Like others have said, most employers will cut you off automatically.  If you have more than one job during the year (for instance, I switched employers in March), you have to change your contributions yourself.  Although I'm not sure what would happen if I didn't.  I guess the IRS has some sort of automatic checking thing your your W-2s to ascertain whether or not you've overcontributed?

Cheddar Stacker

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Re: What happens if you exceed your 401k contribution limit?
« Reply #8 on: December 01, 2014, 01:33:05 PM »
Like others have said, most employers will cut you off automatically.  If you have more than one job during the year (for instance, I switched employers in March), you have to change your contributions yourself.  Although I'm not sure what would happen if I didn't.  I guess the IRS has some sort of automatic checking thing your your W-2s to ascertain whether or not you've overcontributed?

Yep. It's happened to clients of mine. $17,500 at both jobs in one year. Oops. It just turns into a 1099-R once they figure it out, you add it to taxable income, and you move on. No sweat.

ZiziPB

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Re: What happens if you exceed your 401k contribution limit?
« Reply #9 on: December 01, 2014, 03:02:37 PM »
Check your plan documents and elections to see if your plan allows after-tax (not Roth) supplemental contributions and what the default election is.  My current 401k allows after-tax contributions and the default is that your contributions continue at the selected percentage from after tax $$ once you hit the IRS max for the year. 

My prior employer did not allow after-tax contributions and once you hit the IRS max they would automatically stop deductions.

I don't know of any plan that would continue before-tax deductions once you reach the IRS max (unless you have multiple employers throughout the year), so I think your risk of any penalty is nil.  They will either stop once you reach $18K or they will continue from after-tax dollars.

Allen

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Re: What happens if you exceed your 401k contribution limit?
« Reply #10 on: December 01, 2014, 04:09:08 PM »
Like others have said, most employers will cut you off automatically.  If you have more than one job during the year (for instance, I switched employers in March), you have to change your contributions yourself.  Although I'm not sure what would happen if I didn't.  I guess the IRS has some sort of automatic checking thing your your W-2s to ascertain whether or not you've overcontributed?

Yep. It's happened to clients of mine. $17,500 at both jobs in one year. Oops. It just turns into a 1099-R once they figure it out, you add it to taxable income, and you move on. No sweat.

Well hold on, if it 'just becomes taxable income'...

Lets say it's your first year of a 401k and you contributed 18,500 instead of 17,500.  You pay taxes on the extra thousand, but you still have $18,500 in your 401k?  So you'll still have to pay taxes on the $1,000 again when you withdraw it?

Wouldn't the over contribution need to come out of the 401k somehow and get into your bank account where it belongs?

Cheddar Stacker

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Re: What happens if you exceed your 401k contribution limit?
« Reply #11 on: December 01, 2014, 05:43:41 PM »
Yep, it comes out as well, just forgot to mention that part. The 1099-r reports a distribution from your account, classifies it as excess distributions, which means it becomes taxable income with no penalty, and you get a check for the overage which essentially becomes more "net wages".

ThermionicScott

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Re: What happens if you exceed your 401k contribution limit?
« Reply #12 on: December 01, 2014, 05:48:22 PM »
Check your plan documents and elections to see if your plan allows after-tax (not Roth) supplemental contributions and what the default election is.  My current 401k allows after-tax contributions and the default is that your contributions continue at the selected percentage from after tax $$ once you hit the IRS max for the year. 

My prior employer did not allow after-tax contributions and once you hit the IRS max they would automatically stop deductions.

I don't know of any plan that would continue before-tax deductions once you reach the IRS max (unless you have multiple employers throughout the year), so I think your risk of any penalty is nil.  They will either stop once you reach $18K or they will continue from after-tax dollars.

That's what mine does.  Anything you contribute after the max is done with after-tax dollars.

COlady

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Re: What happens if you exceed your 401k contribution limit?
« Reply #13 on: December 02, 2014, 09:49:21 AM »
Cheddar Stacker - Maybe I'm missing something here but if the plan were to refund the excess contribution and simply issue it as a 1099-R wouldn't this benefit the taxpayer because they would've never paid Mcare or SS on that money? They will pay regular tax on the 1099-R distribution amount on their tax return but they never paid their portion of payroll taxes since the amount was treated as non-taxable on their paycheck....

Cheddar Stacker

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Re: What happens if you exceed your 401k contribution limit?
« Reply #14 on: December 02, 2014, 10:09:40 AM »
Cheddar Stacker - Maybe I'm missing something here but if the plan were to refund the excess contribution and simply issue it as a 1099-R wouldn't this benefit the taxpayer because they would've never paid Mcare or SS on that money? They will pay regular tax on the 1099-R distribution amount on their tax return but they never paid their portion of payroll taxes since the amount was treated as non-taxable on their paycheck....

401K contributions are deducted from wages after calculating SS and Med. Take a look at last years' W-2 and you'll see what I mean. It will look something like this:

Box 1  $75,000
Box 2  $9,000
Box 3  $90,000
Box 4  $6,000
Box 5  $90,000

The difference between the $90K and the $75K is $15K of 401K contributions. So you will always pay FICA tax on your wages, even when you contribute some to a 401k. From your gross wage you can deduct certain items like Medical insurance premiums before getting to FICA taxable, but 401K contributions come after that. In this scenario above, maybe your gross wage is $93K, and you have $3K deducted from your check for medical and dental insurance.

Box 1 is what goes on the first line of your tax return to count toward federal income. If you receive a 1099-R with the excess deferral code, it will automatically add it into the first line of your tax return as taxable wages rather than as a distribution from a 401k.

Allen

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Re: What happens if you exceed your 401k contribution limit?
« Reply #15 on: December 02, 2014, 01:40:33 PM »
Yep, it comes out as well, just forgot to mention that part. The 1099-r reports a distribution from your account, classifies it as excess distributions, which means it becomes taxable income with no penalty, and you get a check for the overage which essentially becomes more "net wages".

AHHHH it's a distribution with no penalty.  This actually makes perfect sense, which is why I didn't believe how it could work.

COlady

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Re: What happens if you exceed your 401k contribution limit?
« Reply #16 on: December 02, 2014, 02:24:05 PM »
Ah you're right.  Brain fart. Thanks.

bearkat

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Re: What happens if you exceed your 401k contribution limit?
« Reply #17 on: December 02, 2014, 09:02:12 PM »
Does this method of receiving a 1099-R as described for pre-tax over-contribution work as well if you over-contribute to your $53,000 total contributions (pre-tax/roth, employer, and after-tax combined)?

With the "new" after-tax 401k to Roth IRA rollover strategy, I'm trying to figure out what percentage I need to contribute in after-tax to max out the full $53,000 but it's a little tricky with multiple variables (degree of company match on uncertain bonus and/or raise, etc.). If you can just pull it back out without penalties at the end of the year, that would save me a lot of heartburn.