Regularly contributing to your IRA or 401(k) can pave the way to financial stability later in life. However, even the most diligent savers must adhere to IRS rules, including annual contribution limits.

As we near the close of 2024 and you review your contributions over the last year, you may wonder, “What happens if I exceed IRA contribution limits,” or “How can I avoid penalties if I contributed too much to my 401(k)?” Here’s everything you need to know about amount limits and excess contributions to avoid any unwelcome financial surprises come April 2025.

What Are Current Contribution Limits for IRAs and 401(k)s

Both IRAs and 401(k)s have different contribution limits, and these limits are subject to cost-of-living increases and thus often change annually. The 2024 contribution limits are as follows.

IRA Contribution Limits

For the 2024 tax year, both traditional and Roth IRAs have an annual contribution limit of $7,000. If you are 50 or older, you can make an additional $1,000 “catch-up” contribution, increasing your total contribution limit to $8,000.

Roth IRAs are subject to an additional layer of rules that may decrease your contribution limit, depending on your tax filing status and gross adjusted income (AGI). Generally, your annual contribution limit may be decreased or eliminated if you are:

• Married filing jointly with an AGI of $230,000 or more.
• Single or head of house with an AGI of $146,000 or more.
• Married filing separately and lived with spouse at any time in the tax year.
• Married filing separately with an AGI of $146,000 or more

If your AGI exceeds the limits for a standard contribution based on your tax-filing status, find out how much you can contribute by using IRS Worksheet 2-2 Determining Your Reduced Roth IRA Contribution Limit.

401(k) Contribution Limits

Contributions to a 401(k) can include employee and employer contributions. The current 401(k) annual contribution limits are:

• $23,000 in employee contributions.
• Additional $7,500 in catch-up contribution if you are 50 or over.
• $69,000 combined (employee and employer) contribution, or $76,500 if you’re over 50.

Note that SIMPLE 401(k)s have an employee elective contribution limit of $16,000.

Why Are There Contribution Limits?

Retirement accounts like 401(k)s and IRAs incentivize eligible U.S. citizens to plan for retirement with a tax-advantaged account. The IRS implements contributions to ensure that access to this savings vehicle is equal across income levels. Contribution limits prevent high-wage workers from taking undue advantage of the savings benefits.

Penalties for Exceeding Contribution Limits

If you exceed your 401(k) or IRA’s contribution limits, your account may be subject to penalty tax, depending on when you identify and rectify the error.

If you identify the excess contribution before your tax-filing due date

You can typically avoid a penalty tax by withdrawing the excess contribution amount plus any related earnings before your taxes are due. In this case, the amount withdrawn will count towards your taxable income for that year.

If you identify the issue near your tax deadline and need more time to sort through the matter, you can file for a tax extension.

If you don’t resolve the excess contribution before your tax-filing due date

Excess contributions that are not withdrawn by the tax-filing due date are subject to a 6% penalty for each year they remain in the account. In addition, when you do withdraw the amount, it is considered taxable income in that year. You may need to pay an additional early withdrawal penalty depending on your age and the type of account you have.

How Your Custodian Can Help You Maintain Account Compliance

Your account custodian does more than just hold your assets and complete administrative paperwork. They can work with you to ensure that your account remains in compliance. This includes ensuring that your account avoids prohibited transactions, helping you understand IRS contribution rules as they relate to your account, and assisting you should your account exceed the annual IRS contribution limits.

Specifically, if you identify an excess contribution before the tax filing deadline, your custodian can help you execute a corrective withdrawal by determining the net income attributed (NIA) to the excess contribution.

They can also help you with important paperwork, such as a 1099-R, to resolve the issue.

If you think you’ve exceeded the contribution limit for your IRA or 401(k), immediately contact your custodian. They’ll be able to direct you to the next steps and mitigate any unnecessary penalties that would otherwise erode your retirement savings.

Tips for Account Holders to Maintain Compliance

Excess contributions can lead to headaches and potential financial losses, but there are easy steps you can take to maintain compliance:

• Take note of the annual contribution limits for your accounts each year. Contribution limits often change annually, and noting those changes will help you maximize your contributions while maintaining compliance.
• Remember that annual contribution limits generally apply across all like accounts. For instance, if you have two IRA accounts, your annual combined contribution in 2024 cannot exceed $7,000 ($8,00 if you’re over 50).
• Regularly monitor contributions made through an employer-sponsored retirement account. This includes your elected deferral as well as any contribution made by the employer.
• Review and adjust contributions after milestones, such as a change in marriage status, employment or income.
• Work with a trustworthy custodian who can ensure that your account remains in compliance.
• Rectify any excess contributions before your tax filing deadline to avoid unnecessary penalties.

FAQs

What should you do if you accidentally exceed your retirement plan contribution limits?

If you accidentally exceed your contribution limit, take steps to remedy it as soon as possible. Generally, you can avoid excess contribution penalties by withdrawing the excess contribution plus any related earnings before your taxes are due.

Your account custodian can help you determine the exact amount of the withdrawal to ensure that you meet IRS compliance.

How often should you review your contributions to avoid exceeding limits?

Though you can review your contributions at any time in the tax year, doing so every quarter can help you avoid exceeding limits.

In addition, you should always review your contributions after any changes in your income or tax filing status, as these can directly affect your contribution limits or ability to contribute.

How do contribution limits vary between different types of retirement accounts?

The IRS sets contribution limits for each type of retirement account, including traditional IRAs, Roth IRAs, 401(k)s, 403(b)s, SIMPLE IRAs, etc.

The table below provides a high-level look at contribution limits by common retirement accounts. However, there may be additional limits based on your account type, income, and tax-filing status.

If you’re married filing jointly or a qualifying widow(er)

If you’re married, filing separately (lived with spouse at any point during tax year)

If you are single, head of household, or married filing separately (did not live with spouse)