Why does the 401k have a contribution limit?

291 viewsEconomicsOther

I know that it is a retirement account, so why cant someone put like $10,000 in at once if they have the cash? Also what happens if you do overpay, why is it even possible to overpay in the first place?

In: Economics

8 Answers

Anonymous 0 Comments

**Because the government wants you to pay taxes.**

Money put into a 401(k) account doesn’t count towards your total you made for the year when you file your taxes. So they limit how much you can save to make sure they’ll collect taxes on most of your income.

At the end of the year, the company that manages the 401(k) will do some calculations, and refund that money to you, and you’ll get a check and have to include that when doing your taxes.

There’s a few ways to go over. If you change jobs in the middle of the year, the second company doesn’t know what you put in with the first. Or if you’ve really highly paid, there’s some rules on the 401(k) plan that limit you if lower paid employees don’t use the 401(k) to a certain percentage.

It’s also why there’s a requirement to withdrawal when you hit a certain age, the government wants you to pay taxes on that money before you die.

You are viewing 1 out of 8 answers, click here to view all answers.