The most common type of Retirement Plan, the 401k in 2021 has a maximum deferral amount of $19,500 with a catch up provision for those age 50 or greater of $6.500 for a total of $26,000 again in year 2021.
Why You Do Not Want to Overfund Your Retirement Plan
Should you accidentally over fund your retirement plan … what occurs is a double taxation!
- You do not get the deduction for the contribution
- You will likely pay taxes on the eventual distribution
This is not the end of the world, especially if a very small dollar amount, but you still do not want this to happen…
How Does Overfunding a 401k Occur ? – Job Change
While it may seem puzzling at first, upon second thought the most common reason for overfunding a retirement plan is a job change.
It is impossible for your new employer to know your prior contributions, so an accidental overzealous withholding that throws you over the annual maximum will not be allowed from a IRS tax standpoint.
If you change jobs mid year, be sure to carefully determine your prior withholdings and monitor you new withholdings throughout the year as the burden is on us the employee to keep ourselves in check with the maximum.
For those gainfully employed at the same employer we have not seen an accidental over allowance in a very long time, so most employers have systems set up to automatically stop your contribution once the maximum is achieved. Should your employer merge with another company or change administrators, it is a good idea to make sure they pick up your prior contributions, which can be achieved by checking your paycheck’s ytd retirement plan withholdings after the change.
The good news is there are ways in certain cases to unwind this overpayment, but they are frequently very complicated, may create a tax issue for the IRS to review, and in some cases just not available.
Have a Great “No Overfunded 401k” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth