Overfunding 401(k)
I have a client that changed jobs at the beginning of March this year. He is trying to update his 401k contributions with his new employer to not exceed his overall 2025 salary deferral limit of $31,000 (he contributed about $20k YTD with the employer he just left). If he ends up exceeding $31k across both plans, I know it needs to be corrected before the 4/15/2026 filing deadline. If he and his tax preparer correct any overfunding before the filing deadline, are there any penalties for the overfunding?
Permalink Submitted by Alan - IRA critic on Mon, 2025-03-17 12:10
There are no penalties, but any gains generated on the excess deferrals will be taxable in 2026. He should reduce contributions to the new plan right away in order to avoid excess deferrals in total, and doing so will probably result in more matching contributions than contributing a higher amount up front and then stopping contributions in May or June.
Another option is to exceed the total deferral limit for both plans and not withdraw the excess in order to retain higher matching contributions that would be reclaimed if the excess was returned. The double taxation of the excess would not be paid for decades and could be offset by the retained match and tax deferral of the match and the excess for decades.
Note that amounts of excess deferrals will be subject to tax in 2025 whether removed or not.
The prior plan will likely not be willing to remove the prior contributions to open up room for higher deferrals and more matching at the new employer, but the client might still ask maybe this summer when it’s obvious that the total deferral limit will be breached. And if client wants to ask about this, they should not rush into a direct rollover of the former plan.