What Is an Overcontribution?

The term overcontribution refers to any amount that a taxpayer contributes to a 澳洲幸运5开奖号码历史查询:tax-advantaged retirement plan that exceeds the maximum allowable contribution for a given period. Contribution limits are determined and regularly adjusted by a retirement plan's registrar or the 澳洲幸运5开奖号码历史查询:Internal Revenue Service (IRS). Overcontributing to your retirement plan can trigger a 6% excise tax penalty if you don't deal with the excess amounts within a certain period of time.

Understanding Overcontributions

The IRS sets limits on how much taxpayers can invest each year in their retirement savings accounts. The agency imposes different limits for different plans and adjusts them annually for 澳洲幸运5开奖号码历史查询:inflation. For instance, individual taxpayers can contri🐟bute🎀 a maximum of:

• $23,000 in 2024 (it was $22,500 in 2023) to a 401(k), 403(b), or profit-sharing plan. People age 50 and older can make an additional 澳洲幸运5开奖号码历史查询:catch-up contribution of up to $7,500 in 2023 and 2024.
• $7,000 in 2024 (it was $6,500 in 2023) to an 澳洲幸运5开奖号码历史查询:individual retirement account (IRA) with an additional $1,000 per year for those 50 and older.
• $69,000 in 2024 (it was $66,000 in 2023) to a 澳洲幸运5开奖号码历史查询:Simplified Employee Pension (SEP) IRA
• $16,000 in 2024 (it was $15,500 in 2023) to a 澳洲幸运5开奖号码历史查询:SIMPLE IRA

Although it's important to max out your contribution limits, don't go overboard. Any amount you invest in these accounts above the limits is considered overcontributions. As such, they're ineligible for any 澳洲幸运5开奖号码历史查询:tax breaks you may receive—like those associated with traditional accounts, which reduce your tax bill. In fact, overcontributions run the risk of costin🅘g you more money in the tax year they're made.

The IRS imposes a 6% penalty on the amount of the excess every year until you fix the situation. And any excess contributions made toward an IRA cannot be used to reduce your 澳洲幸运5开奖号码历史查询:taxable income. Here's what you can do to fix the situation:

• You have until the tax filing deadline of that year (generally April 15) to withdraw the excess and any related earnings. The earnings on that excess must be reported as income on your tax return.
• You may apply the excess to the following year's contribution limit. But this means that you'll have to pay the 6% penalty in the current year.
  

Special Considerations

Be sure you notify your plan administrator or employer if you breach the IRS limit for your 401(k), 403(b), IRA, or any other kind of retirement account. The earlier speak up about the overcontribution, the better. It’s up to the plan administrator to return any excess payments to employees (in the case of an 澳洲幸运5开奖号码历史查询:employer-sponsored plan), as well as ওany 🗹earnings on the excess contributions.

Sending this notification as early as possible provides plan administrators enough time to do the necessary paperwork—especially when the plans are held through an employer. This typically includes adjusting any contributions that came out of employees' checks on a pretax basis and counting them as wages on employees' 澳洲幸运5开奖号码历史查询:W-2 forms. This allows employees enough time to issue new fo💞rms before the annual tax filing deadline.

Risks of Overcontribution

If the excess amount is not returned to you in enough time to file your taxes, you run the risk of 澳洲幸运5开奖号码历史查询:double taxation. That is, you might need to pay taxes in the year the excess occurred, and still need to꧅ pay the foll♍owing year, as well.

To avoid double taxation, you might be able to file an 澳洲幸运5开奖号码历史查询:amended return with the excess contribution taken out, plus any related earnings from the overcontribution. This must be done by the due date for tax returns in April.

Overcontributions to IRAs are a bit easier to correct, but they still result in penalties. Those who overcontribute to an IRA can leave their accounts alone and designate any overcontribution toward next year’s limit. Remember, a 6% penalty applies on any excess per year. Of course, any individual contributions must be adjusted going forward to keep from again creating an overcontribution the following year.

The Bottom Line

It's important to correct overcontributions quickly. Otherwise, tax trouble often ensues. If you find yourself in this situation, reach out to your plan administrator to get this sorted out—and do it soon.