Overcontribution

Overcontribution refers to the act of contributing more money to a retirement account or other tax-advantaged savings plan than is permitted by law or plan rules. This can happen in various types of accounts, including 401(k)s, IRAs, and HSAs. The specific limits are set annually by the IRS and can vary depending on the type of account, the individual's age, and their filing status.

Exceeding these contribution limits can lead to penalties and taxes. For instance, if you overcontribute to a traditional or Roth IRA, you may be subject to a 6% excise tax on the excess amount for each year it remains in the account. Similarly, overcontributing to a 401(k) can result in the excess contributions being taxed as income in the year they are made, and potentially subject to an additional 10% penalty tax if not withdrawn by a certain deadline.

Correcting an overcontribution is usually possible. The excess funds, along with any earnings on those funds, should be withdrawn by the tax filing deadline for the year in which the overcontribution occurred, including extensions. If the overcontribution is corrected by this deadline, the penalties are typically avoided. It is important to monitor contribution limits closely and consult with a financial advisor or tax professional if you are unsure about your contribution status.