A 401(k) is a retirement savings plan that allows employees to deposit part of their salary directly into a long-term investment account. In some cases, the employer might match part or all of the employee’s contribution. Employees can choose the type of investment options among the ones provided by the employer. Many U.S. employers offer the plan. It’s named after a section of the U.S. Internal Revenue Code.
The maximum amount that an employer and employee can contribute to the 401(k) plan gets adjusted periodically to reflect inflation. For 2021, the limit on the employee contribution is $19,500 per year for workers under age 50. For people over 50, an additional $6,500 is added as a catch-up contribution.
In case of matching employer contributions, or if employees elect to make additional after-tax contributions, the total employee/employer contribution for workers under 50 is limited to $58,000, or 100 percent of employee compensation, whichever is lower. For those 50 and over, the current limit is $64,500.
When you defer more to the 401(k) than the maximum allowed by the IRS, it’s known as overcontribution. You could end up contributing more than the plan limit if you switched employers and retirement plans during the tax year. Another reason that could lead to excess contribution is if you’re working two jobs with two retirement plans.
The returned excess amount will be added to your total taxable wages for the previous year, so an amended W-2 will be issued. Your tax bill could rise relative to the amount of the excess 401(k) contribution. If the amount isn’t paid back to you by April 15, you could be taxed twice on the amount that goes over the limit. Any income earned from the excess contribution will count on your tax bill due the following April.
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