Super Savers: How Much Is Too Much to Put Into Your 401(k)?

I have a couple of 401(k) questions. The annual limit for contributions is $10,500. Does that include my employer's matching contributions? If I were suddenly lucky and began making $1 million a year and I continued to put 15% of my salary in my 401(k), would I be penalized for excess contributions? Or would the money just get squirreled away somewhere?

-- Laird Nelson

Laird,

Here's some wishful thinking -- some day Congress is going to make saving for retirement less complicated.

The maximum you can contribute to your 401(k) for 2000 is 15% of $70,000, or $10,500. (This limitation should slightly increase each year.) If you get paid twice a month, that means you can contribute up to $437.50 each pay period. (For more on the basics of 401(k) plans, check out this recent featured lesson in our Investing Basics section.)

Sometimes employers offer to match a certain percentage of your contributions with cash or stock. If you receive a match from your employer, count yourself lucky. It's free money to you (though you may have to work there a certain number of years before you can walk away with it). Just be aware that the little gift from your boss can affect the overall level of your contributions.

Total contributions -- both yours and your employer's -- cannot exceed $30,000, or 25% of your compensation, whichever is less. So, for example, if your annual pay is $60,000, the maximum contribution is $15,000 (25% of $60,000 is $15,000, which is less than $30,000).

Hopefully, your benefits or payroll departments are helping you keep track of this.

But what happens if you do go over the top?

You need to take the excess contributions out of your 401(k), or the Internal Revenue Service will hit you with a 6% excess-contribution penalty on the money until it is withdrawn. Excess contributions, as you know by now, come in two forms: You contributed more than $10,500 in 2000; or your total contributions for the year, including your employer's match, exceeded the $30,000 or 25%-of-your-compensation threshold.

Fortunately, you are allowed to withdraw those excess contributions without penalty before April 15 following the year in which they were made.

But you will owe taxes on those excess contributions, so you would need to report that extra money, as well as any additional earnings, as wages on line 7 on your Form 1040 - U.S. Individual Income Tax Return.

If this has happened to you, contact your benefits department to get this money out of your account. Most likely there is paperwork involved in making withdrawals. So find the forms and get going.

Your 1999 Tax Return Is Due!

If you haven't filed your 1999 tax return yet, you've got work to do. So turn off the ballgames and try to remember what the heck you did last year.

Oct. 15 is the final deadline if, back in August, you asked for a second extension of time to file. It falls on Sunday this year, so you have until midnight Oct. 16 to get your return in to the IRS. Hopefully, you paid your tax bill back in April when you requested your first extension. If not, interest has been adding up since then.

But we're here to help you get through this tough time -- and I don't mean the baseball playoffs.

Next week's columns will be devoted to your last-minute panic-mode questions. So send them to [e-mail] and we'll get to as many as we can.

In addition, we are bringing in a big gun. Martin Nissenbaum, director of income tax planning at Ernst & Young, will be here Thursday, Oct. 12, at 5 p.m. ET for a Yahoo! chat. So come armed with questions! Register for the Yahoo! chat at chat.yahoo.com It's free!

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