The short answer: Yes, you can contribute too much to a 401k.

I have been fascinated with this topic ever since it came across my desk a few years ago when a client came to me with a letter from her plan administrator letting her know she had over contributed. We both immediately thought: 

Wait, how did this even happen? Wouldn’t the plan just stop contributions once you hit the max?”

Turns out, it depends. 

I know, it sounds bizarre, right? One would assume that once you hit the IRS contribution limit, your employer’s plan just stops taking money out of your paycheck. But oddly enough, come to find out, not every employer or plan administrator has that safeguard built in (most large companies do, it’s the small plan administrators you have to be concerned about). Which means yes, it’s entirely possible to end up with excess 401k contributions without even realizing it.

So we need to either confirm whether or not our plan administrator will cap our contributions for us or will we be responsible for keeping track.

IRS Maximum Allowable Contributions

Each year, the IRS sets maximum contribution limits for employer sponsored retirement plans like 401Ks, 403bs, and 457 plans. There’s also an additional “catch-up” contribution allowed if you’re over 50, and another one between ages 60-63.

While the exact dollar limits change slightly each year (they typically increase over time), the point is this: you can’t contribute unlimited amounts into your 401K.

If you want the most current numbers, you can always check the IRS contribution limits page.

Common Scenarios Where You Might Contribute Too Much To Your 401K

Here are some of the most common situations where I see people accidentally go over the annual 401K contribution limit:

Job change during the year

If you switched jobs or your employer switched plans, you may have contributed to more than one 401K in a single year. Your new employer has no way of knowing how much you already contributed at your previous job. That means your contributions won’t automatically stop once you’ve hit the IRS limit because your new plan simply doesn’t have visibility into the old one.

Working more than one job

If both employers offer a retirement plan and you’re contributing to both, you could unintentionally go over the IRS max. The limit applies per person, not per plan.

Significant raise or bonus

If your plan doesn’t cap deferrals and you receive a large raise or bonus, your contributions could easily push you over the limit.

Contributing to both Roth 401K and Traditional 401K

While it’s great to diversify, contributions to both are combined and count toward the same annual limit. If HR or payroll misses something, you could accidentally exceed the cap.

What To Do If You’ve Contributed Too Much

If you discover you’ve gone over the annual contribution limit, here’s what typically happens:

• If you catch it early (before the tax filing deadline the following year):

You can work with your plan administrator to have the “excess deferral” returned to you. It will be treated as taxable income for the year you made the contribution, and you may also owe tax on any earnings generated by the excess contribution.

• If you don’t catch it before the deadline:

This can result in double taxation. You’ll have to amend your tax return, and the excess contributions will also be taxed again when they’re eventually withdrawn.

Moral of the story? The earlier you catch it, the less messy and costly it becomes.

How to Prevent Over Contributing to a 401K

• Check your contributions mid year and year end. Make it a habit to log in to your retirement plan and confirm how much you’ve already contributed.
  
• Coordinate when switching jobs. Keep track of your previous plan contributions so you don’t unknowingly exceed the total IRS limit.
  
• Ask HR or your plan administrator. Don’t assume your plan automatically caps contributions, reach out to HR and confirm it.
  

• Watch your bonuses. End of year or any time of year bonuses combined with percentage based contributions can easily push you over so keep track of them if your plan doesn’t automatically cap contributions.

Be Your Own Financial Advocate

This is a perfect example of why it’s so important to take ownership of your financial life. Rules and systems aren’t foolproof, you need to understand your options, know the restrictions, and stay proactive.

Your retirement plan is one of your most powerful wealth building tools. But like anything else, it works best when you engage and participate in the process.

Need clarity on your retirement plan or 401K contributions?

If you’re unsure whether you’re on track or worried about contributing too much, this is exactly where financial coaching can give you peace of mind. I’ll help you understand your options, avoid costly mistakes, and create a retirement strategy that aligns with your goals and lifestyle. Ready to feel confident about your money? Learn more about my services by clicking here.