If you think you’re contributing too much money to your 401(k) account, you need to contact your sponsor as soon as possible. This is because contributing too much to your 401(k) account will end up making you pay twice the tax amount.
Is it Possible to Contribute Much to Your 401(k) Account?
The IRS has some specific rules that will prevent you from investing large amounts of money in your 401(k) account. The amount is $20,500 for people under 30 and $27,000 for people who are above 50. Remember that the contribution to the employer won’t be counted toward that specified limit. Instead, it will be counted as per the overall limit of 100% of your salary.
Most 401(k) users don’t need to worry about the over-contributing issue. The person who is responsible for your account maintenance will prevent you from investing too much money in your 401(k) account each year. However, here are some situations when you might suffer from the over-contributing issue:
- You change jobs and open a new 401(k) account.
- You work on multiple jobs with multiple 401(k) accounts.
- You receive a bonus which was included in 401(k) deductions automatically.
How Can You Avoid Over-Contributing to Your 401(k) Account?
Using multiple 401(k) accounts is undoubtedly a challenging task. Make sure you communicate with your employers and plan the administrators properly so that you can avoid facing such issues. This is one of the best ways to prevent this situation from occurring in the first place.
How Can You Fix Over-Contribution to Your 401(K) Account?
The IRS will allow you to fix your over-contribution issue to a great extent. They ask the 401(k) account holders to contact their plan administrators to fix the issue by paying a specific amount of money as an excess deferral. The plan administrator will pay out the specific amount of money, which will be used as a part of your overall income for the year. When you withdraw that money, the interest on the amount will be taxed.
If you want to leverage the benefits of a 401(k) account while also preventing the over-contribution problem, make sure you visit solo401k.com. Don’t forget to check your distribution at the beginning of the year so that you can initiate any type of withdrawal you want. This way, you can keep the deadline in mind. If you notice the error after the 15th of April, you might end up paying double the amount of taxes due to the excess contribution.
How Can You Contribute More Money Towards Your Retirement?
If you want to ensure you’re maximizing retirement savings through your 401(k) account, you can create multiple 401(k) accounts. When you reach the contribution limit of the 401(k) account, you can open a high-deductible health savings account or Roth IRA. As per Investopedia, pension funds cannot be eligible for Roth IRAs.
However, when opening multiple 401(k) accounts, it’s best if you choose the same plan administrator. This way, you will be able to avoid any confusion regarding your account. Not to mention, the administrators will also help you solve your problem.
Conclusion
This is what happens when you contribute too much to your 401(k) account; make sure you contact us if you have any more questions.
