Avoid Over-Contributing to These Tax-Advantaged Accounts | Krilogy Tax Services®

Health Savings Accounts (HSAs), 401(k) retirement plans, and Individual Retirement Accounts (IRAs) are popular options for individuals looking to enjoy tax benefits while saving for retirement and health care expenses.  However, like any financial account, there are rules and limits to follow to ensure that you avoid penalties and taxes.  A common mistake individuals make is over-contributing to these accounts, which can have significant tax implications.  In this article, we’ll delve into what happens when you contribute too much to your HSA, 401(k), or your IRA, and how to navigate the associated tax consequences.

Contribution Limits

For 2024, the IRS has set the annual contribution limits to HSAs at $4,150 for individuals with self-only coverage and $8,300 for those with family coverage; those aged 55 or older can make an additional $1,000 catch-up contribution.  The contribution limit for a 401(k) is $23,000 annually, and if you are 50 years old or older, you can make catch-up contributions of an additional $7,500.  If you have a traditional IRA, a Roth IRA, or both, the maximum combined amount you may contribute annually across all your IRAs is the same: if you are under the age of 50, you may contribute $7,000 annually and if you are 50 or older, you may contribute $8,000 annually.

Causes of Overcontributing

Common situations that might cause excess contributions include, but are not limited to:

  • If you change employers throughout the year and the total contributions exceed the limits
  • Your income was too high or too low to make a contribution for the year
  • If you made contributions outside of payroll (out-of-pocket), and your combined contributions exceed the limits.
  • For HSAs, if you and your spouse made contributions exceeding the total family coverage limit
  • If you have multiple jobs and make contributions through each employer and exceed the limits

Consequences of Overcontributing

If you overcontribute to your HSA or your IRA, the excess contributions are subject to a 6% excise tax if not corrected by the due date, including extensions, of your tax return for the year the contributions are made.  Furthermore, the IRS imposes the 6% tax on the excess contributions for each subsequent year they remain uncorrected.  Alternatively, if your 401(k) overcontribution is corrected promptly your employer may correct your W-2 and you will pay tax on the excess contributions just as you would with normal W-2 income.  However, this is rare, and normally the excess plus earnings will need to be reported on Schedule 1 as other income and a 1099-R will be sent to the taxpayer the following year.  If your 401(k) excess contribution is not corrected by the due date of your tax return, you will have to pay tax on the contribution amount in the year you overcontributed and the year the excess was withdrawn, and may be subject to the 10% early withdrawal penalty.

How Can You Correct an Overcontribution?

If you do overcontribute to any of these accounts, no need to worry! You can correct the overcontribution before you file your return quickly and easily.  To do so, contact your HSA provider, 401(k) plan administrator, or IRA custodian.  Additionally, your trusted Krilogy advisor can guide you in taking the necessary steps to correct the overcontribution before you file your tax return.

Krilogy®does not provide tax and legal advice. Krilogy®is affiliated with Krilogy Tax Services, LLC. Krilogy®Tax Services provides tax planning and preparation services for an additional cost to Krilogy®clients. You should consult your attorney or qualified tax advisor regarding your situation.