As a medical professional, you’re likely focused on building a strong financial future while balancing a busy career. Maximizing your 401(k) contributions is a key part of that plan, offering valuable tax advantages and helping you save for retirement. However, if you contribute too much across multiple accounts, you could face tax penalties and long-term financial inefficiencies.
This guide walks you through the critical aspects of managing 401(k) contributions, how over-contributions happen, and the consequences you may face if you exceed the IRS limits.
To avoid over-contributing, it's crucial to understand the IRS's contribution limits for 401(k) accounts. These limits are adjusted annually, so it’s important to stay up to date, especially if you’re managing multiple accounts.
IRS Limits for 2024 For 2024, the IRS has set the employee contribution limit for 401(k) accounts at $23,000. If you're over 50 years old, you're eligible for catch-up contributions—an additional $7,500—bringing your total possible employee contribution to $30,500. These limits apply across all 401(k) accounts, meaning that if you have multiple jobs or income streams with different 401(k) plans, your total contributions combined cannot exceed this limit.
Employer Contributions Are Separate While your personal contributions are limited, employer contributions follow a different set of rules. Employers can contribute up to $68,000 to your 401(k) account, including your own contributions. The good news is that this limit applies separately for each employer, so if you have multiple 401(k) accounts through unrelated employers, they can each contribute to their respective plans without impacting the other.
For medical professionals, it’s not uncommon to work for multiple employers or juggle additional income streams from private practice, consulting, or side gigs. While having multiple 401(k) accounts is perfectly legal, it can make it easier to inadvertently contribute more than allowed by the IRS. Here’s how over-contributing typically happens:
Contributing to Multiple 401(k) Accounts If you're working at multiple hospitals or private practices, each employer may offer its own 401(k) plan. As long as each employer provides a separate 401(k), you can contribute to both. The challenge arises when you forget to track your total contributions across all accounts, which could lead to exceeding the $23,000 limit (or $30,500 for those eligible for catch-up contributions).
For example, if you contribute $15,000 to a 401(k) with Hospital A and $10,000 to a 401(k) with Hospital B, your total employee contributions for the year would be $25,000—$2,000 over the IRS limit. This excess would trigger tax penalties if not corrected.
Catch-Up Contributions for Those Over 50 Another common scenario for over-contributing occurs when professionals over 50 take advantage of catch-up contributions. While the additional $7,500 is a great way to boost your retirement savings, if you have multiple accounts, it’s important to ensure you’re not contributing more than the combined $30,500 across all plans.
For example, if you contribute $20,000 to one account and $12,000 to another, your total of $32,000 would exceed the limit, resulting in an over-contribution of $1,500.
Over-contributing to your 401(k) can lead to some costly consequences, both in terms of taxes and missed growth potential. Here’s what you can expect if you contribute more than the IRS allows:
Tax Penalties on Excess Contributions When you contribute more than the IRS limit to your 401(k), the excess amount is no longer tax-advantaged. The IRS treats this over-contribution as taxable income, meaning you’ll have to pay taxes on the excess in the year it was contributed. Worse, if you don’t catch and correct the mistake before the IRS deadline, the tax penalties could increase.
Double Taxation Risk One of the biggest issues with over-contributions is the risk of double taxation. If the excess contribution isn’t withdrawn by the IRS deadline (April 15 of the following year), it remains in the account and is taxed again when you eventually withdraw it in retirement. This double taxation not only reduces the effectiveness of your 401(k) as a tax-deferred retirement vehicle but also eats into your savings over time.
Long-Term Impact on Your Retirement Savings Failing to correct over-contributions can lead to reduced savings for retirement. Not only are you missing out on the full tax advantages of your 401(k), but you’re also reducing the amount of money that could be growing tax-deferred. Over time, this could add up to a significant loss of compound growth.
If you’ve over-contributed to your 401(k), don’t panic! The IRS allows you to correct this mistake by withdrawing the excess contributions before the April 15 deadline of the following year. In our next blog, "Steps to Fix Over-Contributions," we’ll walk you through the process of correcting your over-contributions and avoiding penalties.
Read More: Steps to Fix Over-Contributions
Over-contributing to your 401(k) can be a costly mistake, but it’s also one that can be fixed if caught in time. Medical professionals, with their unique financial situations and multiple income streams, are especially prone to exceeding contribution limits. By understanding the rules, keeping track of your contributions, and taking corrective action when necessary, you can avoid tax penalties and make the most of your retirement savings.
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Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or tax advice. Medical professionals and other readers should consult with a licensed financial advisor or tax professional for personalized advice regarding their specific financial situations.