Why does the 401k have a contribution limit?

Question

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

Answer 1

You should check out r/personalfinance if you want to learn more

>ELI5: Why does the 401k have a contribution limit? 

The US government wants to help people save for retirement by giving you a tax incentive to do so, but that means they don’t collect tax revenue on that money this year. They have a pain tolerance for how much tax revenue they are willing to not collect.

Also, rich people would put almost all of their income in there for the tax shelter, so the rich would get richer. So the limit also helps keep the world a little less unfair. [https://www.investopedia.com/ask/answers/082515/why-are-ira-roth-iras-and-401k-contributions-limited.asp](https://www.investopedia.com/ask/answers/082515/why-are-ira-roth-iras-and-401k-contributions-limited.asp)

>so why cant someone put like $10,000 in at once if they have the cash?

You can make lump sum contributions into an IRA (2024 limit is $7,000). But 401ks and 403bs (2024 limit is $23,000) are workplace retirement plans, so Congress simply wanted to make it a rule where you can only contribute via payroll deduction. It doesn’t always have to make sense either.

>Also what happens if you do overpay, why is it even possible to overpay in the first place

Most (nearly all) 401ks will automatically shut off your payroll contributions once you hit the limit. But if you have switch jobs there’s really no way for Job A to know about Job B, so people can and do overcontribute by mistake in those instances.

If you do overcontribute, you have to remove the excess before next tax filing deadline by calling your current employer. Not that complicated [https://www.irs.gov/retirement-plans/consequences-to-a-participant-who-makes-excess-deferrals-to-a-401k-plan](https://www.irs.gov/retirement-plans/consequences-to-a-participant-who-makes-excess-deferrals-to-a-401k-plan)