1004. This week, Laura explains how to identify and fix overcontributions to your 401(k), IRA, and HSA. You’ll learn the specific deadlines for 2026 to remove excess funds penalty-free and how to handle the tricky tax paperwork that follows.
1004. This week, Laura explains how to identify and fix overcontributions to your 401(k), IRA, and HSA. You’ll learn the specific deadlines for 2026 to remove excess funds penalty-free and how to handle the tricky tax paperwork that follows.
Step-by-Step Fixes: How to work with your account custodian to calculate earnings (or losses) and file the correct tax forms (1099-R, 1099-SA).
Could you accidentally have saved too much in your retirement or health accounts? Saving too much might not seem like a problem to worry about. But there’s a downside to exceeding annual contribution limits for tax-advantaged accounts, like a workplace retirement plan, individual retirement account (IRA), or health savings account (HSA), and that's paying penalties.
So this podcast will review how to fix common contribution errors so you avoid penalties and pay as little tax as possible. Plus, I’ll review why overcontributing can actually be easy to do and tips for avoiding it.
Welcome back to episode 1,004 of Money Girl–I really appreciate you downloading the show and spending some time with me! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and I'm founder of The Money Stack, that's my Substack newsletter. Free subscribers automatically receive my Money Success Toolkit, which includes the exact templates I use to manage my finances, so I hope you'll check that out.
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Catching and correcting an overcontribution to any kind of tax-advantaged account as quickly as possible is critical. That’s because you’re violating IRS rules and will have to pay expensive penalties–unless you remove the excess funds by a deadline. We'll talk more about how to do that.
For IRAs and HSAs, the IRS imposes a 6% penalty for every year that an excess remains in your account. For example, let's say you overcontribute $1,000 to an IRA this year and don’t correct it, you must pay $60 ($1,000 x 6%) this year, $60 next year, and so on, until the $1,000 overcontribution is removed.
With a workplace retirement plan, like a 401(k) or 403(b), the rules are a little different. An overcontribution penalty is actually double taxation. For example, if you don’t remove an excess by April 15, you're gonna pay taxes on that overcontribution in the year that you made the contribution and again when you withdraw it in retirement.
Note that you can’t just withdraw an account’s excess contribution; you also must withdraw any earnings it generated, like interest, dividends, or capital gains. Therefore, you typically need an account custodian’s help in calculating this and correcting an account and filing the necessary tax paperwork.
If you withdraw both your excess contributions and the earnings by the tax deadline that I'll review, you avoid penalties. However, taking excess earnings out of a retirement account requires you to pay income tax on them for the year the contribution was made. So if your overcontribution resulted in any income, in any earnings, you do have to pay tax on that. There's really no getting around that.
In addition, taking funds from a tax-advantaged account before a certain age, like 59.5 for a retirement account, typically means incurring a 10% early withdrawal penalty. But the good news in this podcast is that making a correction by your tax filing deadline allows you to skip that 10% penalty, no matter your age. However, missing the correction deadline means you would be subject to a 10% penalty if you’re younger than 59.5.
Now, I mentioned that the correction deadline is your tax filing date and that's typically April 15. However, for IRAs and HSAs, if you file a tax extension, you actually have until October 15, so you get an extra 6 months, to correct an overcontribution error. But that’s not the case for workplace retirement plans. With those you do have to correct them by April 15.
If you’re fortunate enough to have a retirement plan at work, it’s an incredibly valuable benefit, especially if you receive employer matching. The annual contribution limits typically increase slightly each year, but I'll review them for 2026.
So this year, you can contribute up to $24,500 or up to $32,500 if you’re over 50. However, there is a special, new rule for employees aged 60, 61, 62, and 63. For those four years, the allowable limit is higher at $35,750. However, amounts contributed by your employer, maybe it's from matching contributions or even profit sharing, don’t count toward those limits. So, any excess can only come from amounts you contributed from your own paychecks.
While workplace retirement plans always have custodians and typically have software to flag your account and prevent you from exceeding the annual contribution limit for your age, there are still situations when an overcontribution can easily happen.
For instance, let's say you have two jobs that each offer a retirement plan, or maybe you switch jobs during the year, so you got two different plan during the year. Your total contributions can’t exceed the annual limit. Let’s say you’re under 50, and you contribute $15,000 to 401(k) A, and $15,000 to 401(k) B in 2026. In that case, you've contributed $30,000 to 401(k)s. That is over the annual limit. Remember I said it's $24,500, so you've actually exceeded the annual limit by $5,500 ($30,000 - $24,500). Even though each of the individual accounts look just fine.
Remember that different payroll departments and retirement plans don’t communicate with each other; they only track what you contribute to their respective plans. So in this example, they’d have no way of knowing that you’ve contributed too much to a 401(k) for the year.
Note that if you’re over 50 in my example, you’d be under the limit ($32,500), due to allowable catch-up contributions. So, be sure to check the limit based on your age, and it's your age by December 31 of the year that there could be an overcontribution.
Another situation when it’s easy to overcontribute is when you get a year-end bonus. So maybe your contributions are set as a percentage of your wages. In that case, it could be an unexpectedly high contribution limit that throws you over the limit. Again, it’s your responsibility as a retirement plan participant to ensure that you don't contribute too much for the year.
If you discover an overcontribution to one or more workplace retirement plans, contact your plan administrators and custodians. They can help you determine the amount of excess contributions, plus any earnings, that must be withdrawn.
You’ll receive the excess cash plus earnings (or less any losses) that the contribution generated. If the contributions were traditional or pre-tax, you're typically going to need a corrected W-2 showing the returned amount as higher taxable wages. However, that’s not an issue for an excess after-tax, Roth contribution.
With either a traditional or Roth plan, you must claim any earnings on an excess contribution as investment income in the year it’s distributed. But as I mentioned, you won’t owe an early withdrawal penalty if you make a correction by April 15 of the following year. Otherwise, you could also be subject to a 10% early withdrawal penalty on excess earnings if you’re under 59.5.
Beware there’s a new retirement rule for high earners that starts in 2026. If you made more than $150,000 in 2025, the IRS now requires 401(k) catch-up contributions to be Roth, made on an after-tax basis. So if you try to make them pre-tax, your plan administrator or custodian should automatically recharacterize them, but you want to keep an eye on your paystub to make sure there aren't any errors!
An IRA is a tax-advantaged savings vehicle for individuals with qualifying earned income. No matter how much you earn, you can max out a traditional IRA. However, a Roth IRA is the only type of retirement account that imposes an annual income limit to qualify. In other words, if you earn too much, you don't qualify.
For 2026, you can contribute up to $7,500 or up to $8,600 if you’re over 50 to an IRA. Let’s say you’re under 50 and you maxed out a Roth IRA with a $7,500 contribution. But later in the year, you discover that you’ll receive a nice bonus at work, which makes your income too high to qualify for a Roth IRA. That's a nice problem to have, but it does mean you're going to have to make a correction!
As I mentioned, excess contributions in an IRA get penalized at 6% per year for each year they remain there. I recommend contacting your custodian to help you calculate the total of your excess contributions and any earnings. Removing them before your tax filing due date, including an extension to October 15, will solves the problem.
But still timely corrections of an IRA mean you must pay income tax on any earnings that were generated by the excess; however, there is not a 10% early withdrawal penalty if you’re under 59.5. Your IRA custodian will send you Form 1099-R showing your taxable income to submit with your tax return.
If you’re covered by an HSA-qualified health insurance plan, you qualify to open an HSA and to make tax-deductible contributions up to an annual limit. You can use the contributions and any investment earnings to pay certain healthcare expenses tax-free. So these are great accounts! HSA contributions can come from you, somebody else like a family member, or even an employer.
For 2026, the HSA contribution limit if you have an individual health plan, so it's just you on the plan, is $4,400 or it's $8,750 if you've got a family plan with other people on the plan besides you. In addition, those over age 55 can contribute an additional $1,000. What’s really tricky about HSA limits is that they include all contributions.
So unlike employer matching on a workplace retirement account, employer contributions to your HSA are included in your annual limit. That can make it easy to lose track and over-contribute if your employer makes contributions that are not clearly defined or they are variable. The onus is on you, not your employer, to catch and correct excess contributions.
Another situation when you could over-contribute is when you make a large contribution early in the year but let's say you lose your HSA-eligible health plan later on. For instance, if you leave your job and change to a non-HSA-qualified health plan, in that you're not allowed to make additional HSA contributions. So that means you got to remove a proportional amount of excess if you lose HSA eligibility during the year.
If you over-contribute to an HSA and don't correct it, you must pay a 6% penalty each year on the excess that remains in your account. But if you catch the mistake before you file taxes (including extensions), you can avoid the penalty by withdrawing the excess, plus any earnings.
And just like with a traditional IRA, excess HSA contributions returned to you, become taxable income. If an excess came from your employer, it must get added to your W-2, showing higher taxable income. In addition, excess earnings are subject to income tax.
I recommend contacting the administrator of your HSA to discuss correcting an annual overage. The custodian must file Form 1099-SA showing a distribution of excess contributions and correct your Form 5498-SA, which shows annual HSA contributions.
As you can see, even making an honest mistake with a tax-advantaged account can get tricky, so be sure to get custodial advice and correct it quickly. Put a note on your calendar to review your retirement accounts and your HSA at the beginning of December, so you still have enough time to make changes before the end of the year.
If you find a problem that you can't correct before the New Year, getting excess contributions corrected in the first quarter of the new year is the next best option. You might have a little income tax to pay, but the faster your account gets cleaned up, the less you’ll have to pay. I hope this show has been helpful to remind you what the contribution limits for the special are and what to do if you find yourself putting in too much for the year. That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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