Individuals who want to save for retirement may have the option of investing in a 401(k) plan or a Roth 401(k) plan. Both plans are named after the section of the U.S. income tax code that created them. Both plans offer tax advantages, now or in the future.
With a traditional 401(k) plan, income taxes are deferred on contributions and earnings. With a Roth 401(k) plan, your contributions are made on an after-tax basis, and the tax benefit comes later: your income can be withdrawn tax-free during retirement.
How much do worker contribution limits and sublimits go up?
The Internal Revenue Service (IRS), i.e., the Internal Revenue Service in the United States, has recently communicated that it will increase the maximum contribution limit to employee 401(k) accounts by $2,000 in 2023, bringing it to $22,500 (up from $20,500 in 2022). This is the largest historical limit increase on record, allowing millions of Americans to increase their savings and contributions to their retirement accounts and thereby increase their tax exemptions.
What to Do After You Have Over-Contributed to Your 401k?
Keep an eye on your year-to-date contributions throughout the year. If you’re approaching the contribution limit-or are on track to do so-talk to your employer or plan administrator immediately. Adjusting your contributions to stay within the limit is much easier than taking the actions below. If you do over-contribute, follow these steps to straighten out your account-and taxes.
Notify your employer or plan administrator immediately. The sooner you can rectify the situation, the simpler and better the outcome. If your employer has notified you of an overpayment, act as soon as possible.
Calculate your excess contributions plus earnings. Use this IRS formula for calculating your excess contribution plus “net income attributable” (the earnings your money made while it was in your account). Your plan administrator should do this calculation for you, but using this formula will help you estimate your earnings and double-check their numbers.
Ideally, this notification should be provided by March 1 of the year after the excess deferral contribution, as it’s technically known, occurred. If you contributed too much in the current tax year, the notification should be provided by March 1 of the following tax year.
The excess deferral amount should be returned to you by April 15