Elijah is an employee of a technology company and also has his own company on the side. He has contributed to a 401(k) plan for each job. Now he learned he contributed too much and could owe penalties. What should he do?
First, Elijah should be congratulated for his savings discipline. The earlier you put money into a retirement plan, the more time it has to potentially grow. However, Elijah did a little too much of a good thing. In 2019, he was allowed to contribute up to a combined $19,000 annually, plus catch-up contributions up to $6,000 if he was at least age 50 during any part of the tax year.
If his excess contributions happened in 2019, he still has until his tax filing deadline to distribute his excess contributions plus earnings on the excess to fall within the limit. If he doesn’t take these steps before the deadline, Elijah will owe taxes on the excess, plus he won’t receive basis in the excess deferrals. One final, taxing reminder: The excess deferrals left in the plan will be taxed again when distributed.
Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.