Multiple Jobs? Be Careful of This 401(k) Mistake!

Juggling multiple jobs is becoming increasingly common. Whether you’re chasing a passion project, supplementing your income, or piecing together a career in the gig economy, having more than one source of income can be empowering. However, navigating retirement savings with multiple employers can be tricky, especially when it comes to your 401(k) plans. A common, yet easily avoidable, mistake can lead to a hefty tax bill and penalties if you’re not careful: exceeding the 401(k) contribution limit.

The Temptation of Multiple 401(k)s

The appeal of contributing to multiple 401(k)s is understandable. Each job might offer a valuable employer match, and the idea of maximizing tax-advantaged savings across several accounts seems like a smart strategy. While contributing to multiple plans is perfectly legal, failing to track your total contributions across all plans can land you in hot water with the IRS.

The Contribution Limit: A Single Ceiling

Here’s the key thing to remember: The annual 401(k) contribution limit applies to the total contributions you make across all 401(k) accounts in a given year. It’s not per employer.

For 2024, the contribution limit for employees is $23,000. Those aged 50 and older can contribute an additional $7,500 as a “catch-up” contribution, for a total of $30,500.

The Over-Contribution Conundrum

Imagine you contribute $15,000 to your primary employer’s 401(k) and another $10,000 to a side hustle’s 401(k) in 2024. You’ve exceeded the $23,000 limit by $2,000. What happens now?

The IRS considers this an “excess contribution.” You’ll face the following consequences:

• Income Tax: You’ll owe income tax on the $2,000 excess contribution.
• Penalty Tax: You’ll be subject to a 6% excise tax on the excess contribution each year until it’s corrected. This penalty can quickly eat away at your savings.

How to Avoid the Mistake

Preventing this costly mistake requires diligent tracking and proactive management of your 401(k) contributions. Here’s a step-by-step approach:

1. Calculate Your Target: Determine your desired total 401(k) contribution for the year. Factor in the current annual limit and any catch-up contributions you’re eligible for.

2. Prioritize and Track: Identify which 401(k) plan(s) you want to prioritize. This might depend on employer matching contributions, investment options, or fees. Closely monitor your contributions to each plan throughout the year.

3. Communicate with Employers (If Necessary): If you’re unsure how your contributions are being allocated, contact the HR departments of your employers. They can confirm your contribution percentages and help you adjust them if needed.

4. Err on the Side of Caution: It’s always better to under-contribute slightly than to exceed the limit. Remember, you can also contribute to other tax-advantaged retirement accounts, such as a Traditional or Roth IRA, to supplement your 401(k) savings.

Correcting an Over-Contribution

If you realize you’ve exceeded the contribution limit, don’t panic. You have until the tax filing deadline (including extensions) of the following year to correct the error. Contact your 401(k) administrator and request a distribution of the excess contribution, along with any earnings attributable to it.

You’ll still owe income tax on the earnings distributed, but you can avoid the 6% excise tax on future years.

The Bottom Line

Navigating retirement savings with multiple jobs requires extra attention to detail. By understanding the 401(k) contribution limit, diligently tracking your contributions, and taking proactive steps to avoid over-contribution, you can maximize your retirement savings without triggering unnecessary taxes and penalties. Taking control of your finances now will ensure a more secure and comfortable retirement future.

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