In 2023, I accidentally over-contributed $18,500 to my Vanguard Individual 401(k) because, in a moment of stupidity, I forgot to account for my work’s 401(k) plan, which I essentially maxed out.
I contacted Vanguard and got the full amount of the excess contribution returned to me the following month, still in 2023. It had lost about $200 in value, so the total amount returned was almost exactly $18,300. As far as I’m aware, completing all of this in 2023 removes any penalties or tax burdens for this mistake.
I’m doing my taxes in TurboTax, and I’ve input the original $18,500 as an Elective Deferral into my Individual 401(k) plan. I’ve also input the 1099-R that Vanguard provided me from the $18,300 distribution, including code 8 that is listed in box 7 (excess deferrals taxable in 2023). After inputting these two items and changing nothing else, TurboTax is now calculating that I owe an additional $896 in federal tax, and $40 more in state tax.
I’ve discovered that adding these two amounts is decreasing my business income, and thus reducing my Business Income Deduction in TurboTax by roughly $3,600. I think this is because the $18,500 deferral reduces my business income, and the $18,300 distribution adds to my non-business income. I believe this change to the source of the $18,500 income is erasing the tax break that $18,500 should be benefiting from, but I cannot figure out how to fix this, or if I even am supposed to be able to fix it.
I’m at a loss of what to do, so any help would be greatly appreciated!
