You can find countless approaches to save for retirement. For example, you can open a Roth IRA with a financial planner, contribute to a 401k through your company, contribute to a self-employed retirement plan, make investments through a discount brokerage firm, or a combination of the preceding. Having various retirement plans to pick from provides you options when planning your retirement, but it can also make it easier to make honest mistakes such as going above the annual contribution limitations. Once you achieve your contribution limits, you must stop contributing into the fund.
But what happens if you end up contributing too much cash to your retirement accounts? Let’s take a look at the consequences.
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The 2011 401k maximum contribution limit is $16,500. In most instances, individuals making contributions to a 401k account do not have to be concerned about contributing too much money. The plan administrators ordinarily have a mechanism in place to avoid such a thing from taking place. However, even with these practices in place, it is still possible to contribute excessive funds in a calendar year, especially if you changed jobs and rolled your retirement account over from a previous company to a new account.
If you contribute too much to your retirement account and do not find the miscalculation — and most people do not until it’s too late — you will end up paying twice the tax on the same sum of money. You will pay taxes on the income for the year you earned it, and also at the time you make withdrawals from the money in your retirement account. You will need to correct the excess contributions before the tax deadline of the following year. You will need to include the dollar amount you over-contributed, and account for investment earnings.
The maximum contribution limit for IRAs in 2011 is $5,000 if you are below age 50, or $6,000 if you are age 50 or over. If you determined you have contributed excessive money to your IRA, you need correct the miscalculation by the tax deadline (April 18, 2011 for 2010 tax year), much like the 401k. If you fix the error by withdrawing the money in a timely manner, you will not pay penalties. If you don’t fix the error in time, you will need to file for a tax extension. Money contributed and earnings made on excess contributions are subject to taxation of 6% penalty for every year the over contribution is held in the Individual Retirement Arrangement.
It is critical that you keep an eye on your retirement contributions to make certain you are not going to pay extra penalties or fees. If you are working to avoid contributing too much you will not have to worry about trying to untangle the mess prior to the tax filing deadline or filing a tax extension. If you are concerned about over-contributions, call your 401k plan manager or your IRA custodian to discuss your worries.