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Did you change jobs mid-year? Be mindful of contribution limits for your 401(k)

Did you change jobs mid-year? Be mindful of contribution limits for your 401(k)

October 05, 2021

Have you left your job and started a new one mid-year? What about the contribution limits with your 401(k) or 403(b) retirement plan through work?

If you have changed jobs mid-year, one thing to be mindful of is that there is still a $19,500 limit for the year in your 401(k) or 403(b), plus an additional $6,500 catch-up limit if your plan permits it and you are age 50 or over at the end of the calendar year (as of 2021).

Don't go over. Normally, most employer sponsored retirement plans will have measures in place to keep track of this for you, but it is not uncommon for excess contributions to be made if you have changed jobs (and retirement plans) mid-year, so you will need to be careful. In order to determine how much you are still able to contribute, you will need to take a look at how much you contributed to your previous employer's retirement plan in this calendar year. You can find how much you contributed in the calendar year by looking at the most recent statement for your retirement plan. It can also generally be found on your most recent pay stub from that employer.

After you know how much you have contributed so far, you need to determine how much you are still going to earn in the year. Take your total income and divide it by 12, then multiply the number of months left in the year - i.e. if annual income is $120,000 and you start your new job on July 15th, you only have 5.5 months left in the year, so your calculation would be ($120,000 / 12) x 5.5 = $55,000 still left to earn.

If you have already contributed $9,500 (and you are under 50 years old), subtract that number from $19,500 ($26,000 if age 50 and up), and you will see that you can still contribute another $10,000. Of course, your new employer does not know this, so you will need to be careful not to go over by calculating the maximum contribution percentage you can make. To do this, take the amount you are still able to contribute and divide by the amount you will earn in the remainder of the year - i.e. $10,000 / $55,000 = 0.1818, which is 18% that you can contribute to your 401(k) to make sure you contribute the maximum allowable amount without going over.

What if my compensation is variable? If you are a sales professional or business owner with variable compensation, you will need to be that much more mindful of your contributions into the retirement plan at work. If you are contributing a percentage of your income, as is common, most retirement plans will base this off of your base salary as well as any commissions and/or bonuses. Sometimes, contribution percentages are only based on base salaries, in which case this is easier to calculate. Typically, you will want to base any calculations for contributions on your on-target-earning (OTE), and you can then adjust as necessary as you get closer to the end of the year if you have exceeded or fallen short of that amount. Of course, if you are typically an over-achiever, and are, for example, in a sales role where you have consistently blown your quota out of the water at past companies, you can make an educated guess as far as how much you realistically think you will make. Another good option is to ask what others on your team or in a similar role are making (or what percentage of quota they are achieving) to help you gauge a realistic income amount.

What about the employer match? Good news - the employer match does not count against the maximum contribution. The $19,500 (plus additional $6,500 if 50 or older) maximum contribution only pertains to the employee contributions, and the employer contributions are on top of that amount. 

What if my new retirement plan doesn't permit catch-up contributions? Great news! If you participate in two different plans in one year, regardless if the plans permit catch-up contributions (an additional $6,500 in 2021 if you are turning age 50 by the end of the calendar year), you are still able to take advantage of the catch-up contributions and defer the maximum of $26,000 for 2021 (the $19,500 regular limit for 2021 plus the $6,500 catch-up limit for 2021). For example, if your plan doesn't permit catch-up contributions, but if you participate in two 401(k) plans, each maintained by different employers, you can defer a total of $26,000 even if neither of your employers' plans have catch-up provisions. Of course, you would still not be able to contribute more than $19,500 to either plan, and you would still be responsible for monitoring your own contributions as mentioned above.

What about IRA/Roth contributions? Did you know you are able to contribute to both a 401(k) and an IRA or Roth IRA in the same year? The contribution limits for IRAs are lower than a 401(k), as the maximum is $6,000 per year, plus a $1,000 catch-up contribution if you are 50 or older. The catch is if you make too much money, you will be unable to deduct the contributions on your taxes, potentially creating a situation where you may be taxed twice - this is why a Roth IRA often makes more sense, particularly when making more money (up to a limit, of course, which we will get to). All of the income limits and ranges for IRAs or Roth IRAs, if you are single, married, filing jointly, filing separately, married and you have a 401(k), married and your spouse has a 401(k), etc., are more than the scope of this article, but the key takeaways for the most common scenarios are as follows:

  • If you think taxes are going to be higher when you are retired, prioritize the Roth IRA (so you can pay the taxes now at the current low rate, as opposed to havign to pay them at a potentially higher rate in the future).
  • If you are single and your adjusted gross income (after all of your deductions) is less than $66,000, you can deduct the full amount you contribute to an IRA, but may want to look at a Roth IRA, as your income may be higher within retirement if you do (or have done) a good job saving.
  • If you are single and your adjusted gross income is less than $125,000, you can contribute to a Roth IRA, but if you make between $125,000 and $140,000 you will only be able to contribute a partial amount, and if you make more than $140,000, you will not be able to contribute to a Roth IRA at all.
  • If you are married, filing jointly, and your adjusted gross income is less than $198,000, you can contribute to a Roth IRA, but if you make between $198,000 and $208,000 you will only be able to contribute a partial amount, and if you make more than $208,000, you will not be able to contribute to a Roth IRA at all.
  • If your spouse does not work, you can contribute to a spousal IRA or Spousal Roth IRA on their behalf.

What if I am now self-employed? Can I still max out my contributions? If you leave your job where you had a 401(k) and become self-employed, or also work as an independent contractor in addition to working for an employer, and you setup your own solo 401(k) plan or SEP, you will be able to max out your contributions while still adhering to the maximum elective deferral for the year ($19,500 in 2021). The good news is that within a solo 401(k) or SEP, even if you have already contributed your maximum elective deferral elsewhere, if your business has enough earned income, it can contribute up to $58,000 as a nonelective contribution, because the nonelective maximum contribution applies to each plan separately. The limit for nonelective contributions is determined by the lesser of either $58,000, or 25% of 'earned income' - so if your earned income is $200,000 (after subtracting half of your self-employment tax and the employer plan contributions you made for yourself to calculate 'earned income'), the maximum contribution to your solo 401(k) or SEP would be $50,000 - roughly 20% of total income. If you are 50 or older, the $6,500 catch-up contribution can be made to only one plan, either an employer plan, or your solo 401(k) or SEP. To put things in perspective, the benefit of a nonelective contribution is similar to contributing to a traditional 401(k), as the nonelective contributions you make as the 'employer' will be tax-deductible to your business, and just as with a traditional 401(k) or IRA, it will grow tax-deferred until withdrawn.

What if I have/had a SIMPLE 401(k)? As the name implies a SIMPLE 401(k), or 'Savings Incentive Match Plan for Employees of Small Employers' (SIMPLE), is a simplified version of a 401(k). The SIMPLE 401(k) is intended for the self-employed and small business owners (with 100 or less employees). If you are participating in a SIMPLE 401(k) the maximum contribution you can make to that plan in a year is less at only $13,500 in 2021 with an additional catch-up contribution of $3,000 if you are 50 or older. The good news for you though, is that the total elective contributions you can make between all of your plans for the year remains $19,500 (or $26,000 if 50 or older). 

What happens if I make excess contributions? Excess 401(k) contributions can carry a high penalty and potentially cause double-taxation. The first thing to do is to correct excess contributions in a timely manner - notify your plan administrator before April 15th of the following year that you would like the excess deferral amount, adjusted to include earnings, to be distributed from your plan (the April 15th date is not tied to the due date of your tax return). 

  • Excess contributions withdrawn by April 15th. If you exceed the maximum contribution in a given year, you must notify your plan administrator and take out the excess, adjusted for growth, by April 15th of the following year. The plan will send you a check for the excess plus earnings, and you will also receive a 1099-R the folliwing year showing the withdrawal amounts. Example:
    • Excess contributions for 2021 that are withdrawn by April 15, 2022, will be included in your gross income for 2021. 
    • Earnings on the excess contributions are taxed in the year withdrawn.
  • Excess not withdrawn by April 15th. If you don't take out the excess contribution by April 15th, 2022 (the year following the excess contributions), the excess will be taxable in the year the excess contribution was made (in this case 2021), and the excess will not be included in the cost basis that figures the taxable amount of any eventual distributions from your retirement plan, meaning that this amount will be taxable a second time when you take it out in retirement. Also, if the entire deferral (excess contribution adjusted for earnings) is allowed to stay in the plan, the plan may not be a qualified plan.

Ultimately, you want to avoid excess contributions so you do not get double-taxed as well as have to deal with additional complexities.

What if I still have questions? If you have already made excess contributions or have questions and want help to make sure you do not, consult with a tax professional, 401(k) plan provider, or a financial advisor that is well-versed in retirement plans. Or, reach out to our team and we will be happy to see if we can help.

Greg Jackson believes everybody deserves to have clarity within their lives - personally, professionally, and financially. Greg is a Registered Representative at Clarity Financial, a financial firm in Louisville, CO. He can be reached at (303) 819-1869 or

Registered Representative of and securities offered through OneAmerica Securities, Inc., a Registered Investment Advisor, Member FINRA, SIPC. Clarity Financial is not an affiliate of OneAmerica Securities and is not a broker dealer or Registered Investment Advisor.

Provided Content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice. Neither the companies of OneAmerica, Clarity Financial, nor their representatives provide tax or legal advice. For answers to specific questions and before making any decisions, please consult a qualified attorney or tax advisor.