The OP was about 401Ks which are funded via payroll deductions and unless your payroll department really fouls up, you can’t end up contributing more than you earned.
After the 401K questions were well-answered, I mentioned IRAs as an aside. Because like 401Ks they have an annual limit, and like 401Ks are also limited to your total W2 earnings, but unlike 401Ks lack the safeguard of the payroll department to protect you from making an over-contribution mistake on your own. Assuming you have the free cash or cashflow to make it.
But don’t spousal IRA rules do allow a non-working spouse to contribute to an IRA, as long as the working spouse has earned income equal to or above the total contribution? So in your example, with the retired spouse only having $2K in earned income, they could still contribute the full $7K if the working spouse made at least $12K. That would be a total of $14K earned income and $7K contributed to each IRA.
Am I mistaken? I do know that the rules change substantially if the couple is married filing separately.
I also make contributions to my IRA at the first of the year. Only had an issue once when a real estate sale pushed us above the contribution limit and I had the recharacterize the contribution. Not hard, but a pain. I sure hope I still have the records on that.
D’oh! You are completely correct. I am flat wrong.
In my defense that changed a few years ago and I missed the change.
Prior to 2013 the retired spouse in your/my example could only contribute $2000. For 2013 & subsequent the rules are as you describe: as long as he+she earn more than $14K collectively, they can contribute $7K to each IRA.
This happened to me a very long time ago. If I remember correctly, I called the IRS and asked for advice. They told me what form to fill out some form. I don’t remember the details of how the money was fixed - I think my new companies 401k administrator sent me a refund check, and I had to report the new amount as taxable income.
Outside of that - one thing to keep in mind for those front loading and not retiring is if their company provides partial matches for donations. Most of the companies I’ve worked for do something like “1% match of each contribution, up to a limit of xxx.” When it’s worded like that, you only get the match for pay periods that you contribute to the 401k. That might be offset by the fact that your money is invested sooner.
My company just changed their official policy to do the full match regardless of timing, so I no longer have to think about that part.