Maximizing your 401k or other similar retirement plan is one of our favorite tax saving ideas. We recommend all do this mostly throughout the year evenly.
In most situations the plan administrator watches the funding levels and stops our contributions when they hit the maximum Federal allowed tax deferred level. There are a few situations that can allow for an overfunding of your plan.
Change of Jobs
It makes sense, we change jobs and the new sponsor has no idea wha the old sponsored plan allowed us to defer. In this case, be sure to keep your last paycheck from your old employer, which we HIGHLY recommend anyway, and track your contributions.
Merging or splitting of your Company
If your company splits or merges with another company, it is highly likely the new plan will not have visual of your old contributions. Once again, keep your last paycheck from the old company and track your new company contributions.
Changing of Administrators
This is a less likely overfunding option, but occasionally, it does happen. Once again, keeping your last paycheck from the old sponsor and tracking your total contributions is a good idea.
Overfunded, Now What?
Accidents do happen and this is not the end of the world. We would recommend you work with your current employer/administrator to apply the possible following fixes.
- Refund the extra funds- Watch your w-2 carefully as this can cause inconsistencies- Keep a year end copy of your last paycheck is a must on this!
- Apply the extra funds to the following year- Not always available – Can be the easiest if administrator has sophisticated systems.
If for some reason you are not able to reverse the over contribution, you will be double taxed. Your overcontribution will be taxed as income and then you will be taxed when the funds are distributed, leading to a double tax. Not the end of the world for a small amount, but larger amounts wil be cumbersome.
In closing, keeping a final paycheck in any type of change is recommended, especially in the examples we mention, along with a comparison of your W-2 will help prevent many of these and other problems.
Have a “Less Taxing” Day!
John A. Kvale CFA, CFP