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What should I do if I contributed too much to my 401k?

I switched jobs mid year and accidentally went over the set contribution limit. What should I do? How does the IRS handle the extra money?

Mar 15, 2012 by Fiona from Reading Station, PA in  |  Flag
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First of all, congratulations on being able to max out your contributions in this economic enviroment. Here is my understanding.If you don't correct an excess contribution, you'll end up with double taxation: you're taxed on that money in the year you earn it and also in the year you take the money out of your account. To avoid that result you have to take a corrective distribution by April 15 of the following year. The corrective distribution will include the dollar amount necessary to bring your contributions within the limit, plus any investment earnings on that extra money for the time it was in your account.

You can take the corrective distribution from any account. For example, you might start out contributing to a traditional account and later contribute to a Roth account. It might seem logical that the Roth account is where you have the excess, because that's where you made the later contributions that put you over the limit. But you can choose to take the corrective distribution from the traditional account if that seems like better planning. Likewise, when two or more employers are involved, you can take the corrective distribution from the plan where you made the earlier contribution — if you can get the former employer to cooperate. The key is to get your total down to the limit with a distribution from some account by April 15.

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