Contributing too much to a 401(k)

For many Maryland workers, a 401(k) retirement account is one of the perks of their jobs. However, the Internal Revenue Service has found that some people have taken advantage of the system and are making contributions that are in excess of what is currently allowed.

At present, the annual contribution limit is $18,500. The Treasury Inspector General for Tax Administration (TIGTA) has issued a report that quite a few employees have been taking advantage of the system and exceeding that threshold. This of course has had the effect of reducing the amount of revenue that the Treasury Department would otherwise get. The Internal Revenue Service has indicated in response to the report that it plans to take a few steps to try and correct the problem. One would be to notify all employers about the issue. More importantly for taxpayers, the IRS has stated that it will make this issue a focal point of audits.

The problem is not necessarily widespread, and it has been estimated that, after a review of a sampling of tax returns for 2014 (when the annual contribution limit was $17,500), only 1,400 taxpayers who have only one 401(k) plan have exceeded the limit. This would have resulted in approximately $8 million in additional tax revenue. However, many taxpayers have more than one such retirement account, and the TIGTA believes that the resulting shortfall in these cases is more than $30 million.

There is a way for taxpayers who get audited for this particular reason to avoid further penalties, and that is to withdraw the excess contribution and treat it as income for the year it was made. It might be advisable for people who are in this position and have been contacted by the IRS to meet with a tax attorney and discuss the issue.

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