Did you know that the IRS penalizes you for contributing too much into your retirement account?
The IRS imposes a 6% penalty for each year that any excess amount contributed remains in a retirement account until it is rectified.
In other words, if you put too much into your retirement account, you will have to pay a 6% penalty on the excess amount until you withdraw that excess contribution.
Example:
You are age 45 this year.
- The maximum allowed contribution to your 401(k) for the 2024 tax year is $23,000.
- You contribute $24,000 by Dec 31, 2024.
- The $1,000 is the excess amount; a 6% tax penalty will apply to this $1,000 until you withdraw it from your 401(k).
CONTRIBUTION LIMITS FOR TAX YEAR 2024
Under age 50
- 401(k), 403(b), 457, 401(a), TSP: $23,000
- Traditional/Roth IRA: $7,000
Age 50 and older
- 401(k), 403(b), 457, 401(a), TSP: $30,500
- Traditional/Roth IRA: $8,000
WHEN TO DOUBLE CHECK YOUR CONTRIBUTIONS
If you experienced any of the following events throughout the year, you should check how much you have contributed year to date to ensure you have not over-contributed to your accounts.
- Job Changes: If you’ve switched jobs and contributed to multiple retirement accounts from different employers.
If you have access to multiple 401(k) plans through different employers, you are still limited to the total employee contribution amount for the year.
Example:
You contribute to a 401(k) at Employer 1 from Jan to June 2024. You then get a TSP at your new job in July 2024 with Employer 2, a government agency.
You cannot contribute $23k to the 401(k) and another $23k to the TSP. You can only put in $23k between the 401(k) and TSP. The IRS aggregates the total contributed between the two accounts.
How will the IRS know?
The financial institutions at Employer 1 and Employer 2 will report your contributions to the IRS.
Because the retirement plans at Employer 1 and Employer 2 do not communicate with each other, you are responsible for tracking your contributions between both institutions.
- Bonuses and Raises: These can impact your contribution levels, bringing you closer to the limit than expected.
Some employers will have systems in place to alert you that you have reached your annual contribution limit; others do not. Thus, it is important to track how much you have contributed year to date.
- Employer Contributions: While they don’t count toward your personal limit as an employee, they do count toward the overall limit of $69,000 (under age 50) and $76,500 (age 50 or older) for the year 2024.
The $69,000 limit is the total contribution between you and your employer.
Example:
If you put in $23,000, you are maxed out on your deferral amount for the year; however, your employer can make profit sharing and matching contributions to your 401(k) up to $46k. That is $23k plus $46k, totaling $69k between you and your employer.
METHODS TO CHECK YOUR CONTRIBUTIONS
Here are two methods to check how much you have contributed so far this year.
Method 1: Review your paystub
- Download your latest paystub. If you switched jobs during the year and contributed to multiple plans, get the last paystubs from all your employers.
- Look at the YTD column for your retirement plan contribution. This indicates how much you have contributed in total to the account. Add these numbers if you had multiple employers throughout the year.
Method 2: Review your latest statement
- Locate Your Latest Statement: Retrieve your most recent retirement account statement.
- Find the Transaction History: Look for a summary of your YTD contributions in the transaction history.
- Analyze Your Contributions: Review the total contributions made so far this year.
HOW TO MAKE ADJUSTMENTS & CORRECTIONS
If you’re close to exceeding your contribution limits, adjust how much you defer for future payrolls.
If you over-contribute, contact your employer’s retirement plan administrator ASAP for specific steps to withdraw the excess amount. The process is slightly different with each employer.
BOTTOMLINE
Regularly reviewing your retirement contributions helps you avoid additional taxes and penalties. The process to withdraw any excess contributions vary by employer and can be a cumbersome, laborious, long process.
Make sure you know the annual contribution limits and set a reminder each November to check how much you have contributed so far for the year.
By staying proactive, you can maximize your savings while avoiding costly mistakes.
