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  • Writer's pictureNicholas Pihl

A Common 401k Mistake to Watch Out For (and How to Fix It)

In 2023 you can contribute $22,500 to your 401k, plus $7,500 of catch-up contributions if you're over 50. So, if you're under 50, you can contribute $22,500. If you're over 50, you can contribute $30,000.

Here's what to watch out for if you have multiple jobs that each offer their own 401k (or 403b, or whatever).

The limit for all of your 401k contributions combined is $22,500 (assuming you're under 50). You don't get to contribute an extra $22,500 just because you have a second job. Usually your 401k provider will keep you from going over your limit within their particular plan, but usually they don't know that you have another 401k out there, and they certainly don't know how much you've contributed.

What happens if you go over? Say you maxed out one 401k, and then found out that your other employer auto-enrolled you in their 401k, such that you contributed $22,500 to your main 401k, and $3500 to the other one. And again, these numbers are if you're under 50. If you're over 50, the relevant figure is $30,000, not $22,500.

To fix this, you need to make a "corrective distribution." That might sound scary, but it really isn't a big deal. Most 401k providers will help you with the math of determining how much to distribute, as well as handling the distribution. All you really need to do is call in to the provider you want to make the distribution from, and explain your situation, including how much you've contributed to all of your plans.

A couple notes: The distribution will be taxable, and if your money grew at all while it was in your plan, you'll also owe taxes on the growth (but only on the growth resulting from the excess amount contributed, not the total growth of the account). There's not much you can do about this, but I want you to have the heads up so you're not surprised.

The other thing to keep in mind is that you don't want to give up your employer match if you can help it. So in this example, where you contributed $22,500 to one account, and $3500 to the other, I'd probably steer you towards taking distributions from the $22,500. Why is this? Let's assume both employers offer a 3% match. On the $22,500, you're probably well above the point where they stopped matching your contributions. On the $3500, they're probably matching almost all of it. You don't want to undo your match, so don't take it out of the $3500, take it out of the $22,500. (Disclaimer: this might not be true for you and there are other factors that could affect this decision, so this isn't an exhaustive or personalized article. Just free education. And you know what they say about the value of free advice....)

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