Overcontributed to a 401(k)? How to Handle Excess Contributions
To avoid being taxed twice, notify your plan administrator and have excess contributions removed before tax day.
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Contributing to an employer-sponsored 401(k) plan can help you boost your retirement savings and potentially reduce your taxes. But if you contribute more than the amount allowed by the federal government, you could wind up actually increasing your tax liability.
People who overcontribute to a 401(k) can be subject to tax consequences on the amount above the contribution limit of $23,500 in 2025. People age 50 and older can contribute an extra $7,500 as a catch-up contribution. Due to the Secure 2.0 Act, those ages 60, 61, 62 and 63 get a higher catch-up contribution of $11,250. There's also a 10% early withdrawal penalty if you're under 59.5 years old.
Here’s what you can do if you've made excess 401(k) overcontributions and how to avoid similar issues in the future.
What to do if you overcontributed to your 401(k)
Here are three steps to fix excess 401(k) contributions.
Contact your employer or plan administrator. Tell your plan administrator you made an "excess deferral." For example, if you overcontributed by $1,000, that amount needs to be returned to you before the tax-filing deadline. The plan administrator is required to return the excess funds to you — as a "corrective distribution" — plus calculate and return additional earnings (if any) and reissue paperwork that corrects the 401(k) overcontribution. That can take time, and sometimes companies can be slow about doing this.
Get a new W-2 and pay taxes. The returned excess contribution will be added to your total taxable wages for the previous year, so your employer will send you an amended W-2. Your tax bill may rise (or your tax refund may shrink) due to the return of the excess 401(k) contribution.
Handle excess earnings. Any gains you earned on the excess contribution are taxable. You’ll receive a Form 1099-R at the end of the tax year in which the excess 401(k) contribution was returned to you.
How to avoid making excess 401(k) contributions
Don’t be confused by the annual change in 401(k) contribution limits. Each year, usually in October, the IRS announces the 401(k) contribution limits for the next year. Be sure you know what the annual limits are so you understand how they apply to you.
Consider only your contribution, not your employer's matching contributions. We're only talking about if you, personally, made an excess contribution to your 401(k). This scenario addresses only the limit on the pretax wages you contribute to your 401(k) plan. You can contribute as much as possible to get the full match from your employer, but keep your eye on your contributions if you don’t want to exceed the limit.
Excess 401(k) contributions after Tax Day
If your excess 401(k) contribution isn't returned in time, you may end up paying income taxes twice on the overcontribution, as well as a 10% early distribution penalty if you're under 59.5 years old. The excess 401(k) contribution should be returned to you by the tax filing deadline, which is generally around April 15.
You’ll be taxed first in the year you overcontributed, and again in the year the correction occurs, says Denise Appleby of Appleby Retirement Consulting, an Atlanta firm that helps companies administer employer retirement plans.
» Calculate your future balance with our 401(k) calculator
Common reasons for excess 401(k) contributions
Here are scenarios in which excess contributions are more likely to happen.
You switched employers and retirement plans during the tax year. Make sure your new provider is aware of the year-to-date balance of your contributions to your old retirement plan. And consider rolling over 401(k) accounts from previous employers into your new plan or an individual retirement account.
You have two jobs with two retirement plans. If you’re participating in two retirement plans, such as a 401(k) and a 403(b), make sure your combined contributions don’t exceed the annual limit. The contribution limit is per individual, not per plan.
You got a raise or bonus during the tax year. Lots of people set and forget their automatic contribution levels as a percentage of their income in order to get the full match from their employer. Although that can generally be a good strategy, but applying the automatic percentage to a larger salary means a larger 401(k) contribution. That’s where excess 401(k) contributions occur, says Appleby.
You were automatically enrolled in your 401(k). Recent federal law changes will also affect 401(k) plans. Starting in 2025, under the Secure 2.0 Act, employers are required to automatically enroll eligible employees in 401(k) plans. The contribution rate starts at a minimum of 3% and increases by 1% each year until it reaches at least 10%, but not more than 15%. This legislation was enacted to help more Americans save for retirement, but if you're a high earner, your contribution percentage will be something to keep an eye on.
» MORE: How to retire early
What can I do with my money if I max out my 401(k)?
If you're maxing out your 401(k) plan contributions, it might be a good idea to speak with a financial advisor to consider other ways to invest. These articles might help:
» Ready to get started? See our picks for the year's best financial advisors
NerdWallet editor Pamela de la Fuente contributed to this story.
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