What happens if I over contribute to my Retirement Account?

Apr 6
4 min read

Over contributing to retirement accounts happens more often than you'd think, especially for physicians juggling W-2 income and 1099 work.

Unfortunately, the IRS doesn't let over contribution slide. If you don't catch it before tax day, you're looking at penalties that compound every year till you fix it.

The 6% Excise Tax: Your New Annual "Friend"

The IRS will charge you a 6% penalty on excess contributions every year until they're removed. This isn’t a one time slap on the wrist. It's a recurring charge that keeps hitting your wallet until you fix the problem.

Think of it like a subscription service you never wanted. Each year those excess funds sit in your account, you’re paying 6% on top of whatever taxes you already owe.

The Two Windows to Fix It

Option 1: The Clean Exit

(Before Tax Day)

If you withdraw excess contributions by the tax filing deadline (including extensions, usually October 15), you can avoid the ongoing 6% penalty. This is called a "timely correction," and it's your best option.

Here's what happens during a timely correction: You must withdraw the excess contribution plus any earnings it generated. While the earnings are generally taxed as ordinary income, the SECURE 2.0 Act removed the 10% early withdrawal penalty on earnings for excess IRA contributions.

Option 2: The Penalty Route

(After Tax Day)

Miss the deadline? You are likely facing double taxation.

For 401(k)s, the excess is taxed once in the year contributed and again in the year it is eventually returned to you.

For IRAs, that 6% excise tax keeps stacking up every year until the funds are removed or applied to a future year.

Important: If your account increased in value after your excess contribution, the amount you need to withdraw may actually be higher than the amount you contributed.

The Different Contribution Limits You Need to Know

Employee Deferrals: The Shared Limit

For the 2025 tax year, the employee deferral limit for 401(k) and 403(b) plans is $23,500. For the 2026 tax year, it increases to $24,500.

This limit applies across all your 401(k) plans combined
If you have a W-2 job and a Solo 401(k), you cannot max out the employee portion of both.

Employer Contributions: The Separate Buckets

If your employers are unrelated (not part of a controlled group), you can generally receive employer contributions up to the Section 415 limit for each job.

The total limit (employee + employer) is $70,000 for 2025 and $72,000 for 2026.

Note: For high earners (wages over $145,000–$150,000 in the prior year), the SECURE 2.0 Act requires catch up contributions to be made as Roth starting in 2026.

IRA Limits

The total annual contribution to all your traditional and Roth IRAs is $7,000 for 2025 and $7,500 for 2026. (High income physicians often exceed this if they forget they are phased out of making direct Roth IRA contributions based on their income.)

The Controlled Group Problem

Here's where it gets tricky. If your employers are "related" to each other as a parent subsidiary or brother-sister controlled group (generally 80%+ common ownership), or an affiliated service group, the overall limit is applied once across all plans.

This bites physicians who own multiple practice entities. Your anesthesia practice and your pain management clinic might seem separate, but if you own more than 80% of both, the IRS treats them as one controlled group.

How to Fix It: The Step-by-Step

Calculate the Excess: Review your contribution records from all your providers.
Contact Your Plan Administrator: Notify them immediately. For 401(k) errors, you should aim to notify them by March 1 to ensure the correction is processed by Tax Day.
File Proper Forms: You may need to report the excess and pay any necessary excise tax using Form 5329.
Handle Tax Reporting: You will receive a Form 1099-R to report the corrective distribution, which will include any taxable earnings.

The Alternative: Apply to Next Year

You could apply your excess contributions to the following year's contribution limit if you meet the income requirements. But you won't avoid the 6% excise tax for the current year.

You'll pay the 6% penalty for the year in which the excess contribution was made, but you won't have to pay a future penalty. This only makes sense in specific situations, usually when the excess is small and you're certain you'll be eligible to contribute less next year.

Special Considerations for Physicians

The Backdoor Roth Issue

If you're doing Backdoor Roth conversions (and as a high earning physician, you probably are), be careful with SEP IRAs. A SEP IRA will count against you when doing a Backdoor Roth IRA due to the pro-rata rule. Solo 401(k)s don't have this problem.

The Mega Backdoor Roth

Some Solo 401(k)s allow after tax contributions that can be converted to Roth. The employee contribution limit of $24,500 is combined across all your 401(k) plans, but the overall $72,000 limit applies separately to each unrelated employer. This creates opportunities for massive tax free growth if structured correctly.

W-2 Plus 1099 Income

If you are a W-2 physician and also have self employment income through side gigs, you can have both a Solo 401(k) and an employer-sponsored 401(k) plan, but be mindful of your contribution limits.

The strategy: Max your employee deferrals at your W-2 job (especially if there's a match), then use your 1099 income exclusively for employer profit-sharing contributions to your Solo 401(k).

Bottom Line

Over contributing to retirement accounts is fixable, but time matters. The difference between catching it before April 15 and catching it in June could cost you thousands in penalties and double taxation.

Your retirement accounts are powerful wealth building tools. Just make sure you're playing by the rules.

Disclaimer: This material is intended for educational and informational purposes only and does not constitute tax, legal, accounting, or financial advice. The content is general in nature and may not apply to your specific circumstances. Tax laws and financial regulations are subject to change and interpretation, and the application of these laws can vary based on individual situations. Before making any decisions, you should consult with a qualified tax advisor, legal counsel, or financial professional.

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