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If I exceed the annual $10,500 limit in my 401k contributions (say $11,000) I understand I will pay income tax on the $500 in excess. But does anyone know if that $500 will still grow tax free, like the rest of the 401k?

The "rest of the 401K" doesn't grow tax free (like a Roth IRA), it grows tax-deferred (like a Traditional IRA).

If so, shouldn't we be encouraged to contribute any additional monies we have to 401k rather than stick it into a separate long term growth account that has no tax advantages?

I believe you will not only pay tax on the $500 overpayment this year, but you'll again be taxed when that $500 is withdrawn.

You would most definitely be better off putting that money into a Traditional tax-deductible IRA, or a Roth IRA, and would probably be better off in a tax-efficient taxable account (index fund) paying long-term captial gains taxes once.

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