Excess 401k Contributions
By Laura Johnson, EA
“I changed jobs during the year and was contributing to both employers’ retirement plans. Now I think I put in too much money to my 401ks. What do I do?!?!”
Annual limits on 401k contributions apply at the individual level, not the plan level. For 2024, those limits are $23,000 for those under 50 and $30,500, including catch-up contributions, for the 50-and-over crowd. In 2025 the limits are raised to $23,500 and $31,000, respectively. If the plan document allows, employees 60 through 62 can contribute up to $34,750. Just like a speed limit sign, you can be penalized if you exceed the limit.
Example: Kelly is 40 years old. She switched jobs in 2024 and contributes $24,000 between her two employers’ 401k plans. Her applicable limit is $23,000. She has an excess contribution of $1,000.
Keep in mind that these are the rules for correcting 401k contributions. Other retirement plans, like traditional or Roth IRAs, have their own rules for correcting excess contributions.
Now what to do about it?
It depends on when you realize you made the mistake.
If you discover the error before the original due date of your return - that is the original April due date; filing an extension does NOT extend this deadline - you can take steps to correct the excess contribution. Or you can do nothing.
If you discover the mistake after the original April due date, you are stuck. There is nothing you can do.
The “do-nothing” approach
First let’s tackle the do-nothing option available to all.
You keep the excess contribution in the 401k plan. The amount of the excess contribution will be taxed now in the year you make the contribution (that would be on the 2025 tax return for a 2025 contribution). You add an excess tax-deferred contribution to the wages line of your return. It will be taxed again when you receive a retirement distribution just like the rest of your 401k funds. Doing nothing = being taxed twice. Not great, but not a prison sentence.
Some folks might choose this option if the amount of the excess contribution is small, or they don’t feel up to the paperwork. And it bears repeating that it is the only option if you miss the original deadline for making a correction.
I don’t want to be taxed twice. What is the correction?
You pull out the excess contribution, plus the earnings on the excess, before the original due date of the return. You will be taxed on the amount of the excess contribution in the year of the contribution (2025 for a 2025 contribution). You will be taxed on the earnings from the excess in the year you withdraw it (ie could be 2025 or 2026 depending on when you discover and correct the error).
If the excess contribution was made to a Roth-feature 401k, the excess contribution, when removed, is not taxable. The earnings are taxed.
The corrective distribution will be reported on Form 1099-R in the year of the distribution. Which may come in the year after the excess contribution. Example, a 2025 excess 401k contribution is removed in Jan 2026. You report the income on your 2025 tax return, Form 1099-R will come in 2026. Do NOT include the amount again on your 2026 income tax returns. Corrective distributions are not subject to the additional 10% tax on early retirement distributions.
Let us know if you need help correcting a mistake with a retirement plan. At John Schachter + Associates Inc., we help lots of clients with excess contribution issues and other retirement plan snafus!
