Here’s What Happens If You Go Over Your Pension Contribution Limit
When you first start saving for retirement, you may think that you will never get to the point where you can “deplete” your annual contribution. But your income may have leveled off significantly since then, or you may have opted for retirement savings. You may see yourself approaching an annual limit of $ 19,500 for your 401 (k) or $ 6,000 for your IRA.
You can also add a little more, right? Not so fast. Saving for retirement is like playing the Price Is Right game: you want to get as close as possible without crossing the threshold.
Want to know what happens if you do this? (Here’s a hint: you will lose some of that money.)
First, there is usually no excess of the contribution limit for retirement accounts. If you have one retirement account, your risk of going over the limit is very low because the firm that manages your plan will keep track of your contributions over the year. But if your finances are more complex – you may have several different retirement accounts – you may need to pay more attention.
“The biggest reason for this is when a taxpayer changes jobs during the year and essentially has two retirement accounts that are not monitored until the annual cap,” said Mike Savage, CPA and founder of 1-800Accountant . “If they only have one retirement account, usually the financial institution notifies [them] of the excess contribution,” he said.
Another way to get stuck in this situation is when you have reached the income limit for your retirement account, such as the Roth IRA . You may have fully funded your Roth for a year, but were also eligible for an employer-sponsored plan. “Most of the people who end up in surplus do this because it’s difficult to measure how much income will be at the end of the year,” said Amin Dabit, director of consulting at Personal Capital .
If you go over your retirement account limit, the IRS will not let you ride unnoticed. You need to withdraw the surplus from your account as soon as possible, otherwise you will be subject to an excise tax of 6% .
If you can remove the excess contribution before filing your tax return, you do not have to pay a 6% penalty. However, you will need to list this as income (which means it will be taxed) and you may have to pay a 10% early withdrawal penalty from your retirement account.
You might be tempted to just leave your money there and take a 6% penalty instead of 10%. But in reality, this is not the case – this 6% will not disappear if you do not correct the situation. “The IRS will charge an excise fine of 6% for each year the amount remains in the account,” explained Dabit.
If your retirement account is opened through your employer, you will have to ask him to pay you “excess grace”, including any income on it, “said Caleb Silver, editor-in-chief of Investopedia . If you have already received the W2 from your company, they will need to provide the corrected one.
You can also file a modified tax return; You can avoid the penalty by deleting the excess and re-filling it before the renewal deadline in October.
“Look at your earned income, modified adjusted gross income and annual contribution limits,” Silver said. “Keep track of any contributions you have already made in the tax year and make sure you include all contributions you make between January 1 and April 15 in the correct year.”
If you think the coming year is going to be extraordinarily successful – perhaps expecting a pay raise or a bonus you want to make for retirement – you can contribute to last year’s cap now to avoid problems after your income (and your contribution). increases. “One of the best ways to avoid investing too much is to talk to a tax advisor and try to pay the previous year’s contribution at the same time as filing your tax return,” advised Dabit.