Excessive contribution to 401k in 2021 - Vanguard said to report in 2022 tax return?

Forum|Forum|4 years ago
February 28, 2022
2 replies
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Hi Turbo Tax Community. I have a question about excessive contribution to my 401k and how vanguard handles the situation. I requested refund of the excessive amount, and they gave me seemingly contradict information in their letter with the check to me.

Here are the details:

In 2021, I changed job and worked for two companies. I over contributed $300 to my 401k in 2021, and my current company's 401k administrator (vanguard) returned the $300 to me via a check in February 2022. The check is received along with a letter.

The letter states that:

"Your corrective contribution of excessive deferrals is required by the IRS to be reported on two 2021 IRS forms 1099-R.

One of these tax forms will be specifically coded to report the principal amount of your excessive deferrals which will be tax to you in 2022. These forms will be sent to you in January 2023.

Because you will not receive the IRS form 1099-R till next year, do not wait to file your 2021 form 1040. In addition, if you have already filed your form 1040 and did not included the principal amount of excess deferrals as taxable income (line 7), you will need to file an amended return for this year.

The amount of your refund is not eligible for rollover into another qualified plan or individual retirement account ("IRA") "

Here is my confusion:

1. In the letter it stated that I need to file my 2021 tax with the principal amount of excess 401k contribution but I will not receive any tax form for the excess till 2022. How do I report the amount?

2. I called vanguard and asked for some help and explanation and they told me that I will receive two 1099-R in 2023, and the excess $300 will be my 2022 income.

Based on my research, my employer should give me a new w-2 so that I can report it this year. He https://www.nerdwallet.com/article/investing/excess-401k-contribution-what-to-do

But vanguard said that was not how they handle it.

If I report the excess amount in 2021 tax and vanguard gives me 1099-R in 2023 for 2022 tax, does it mean that I will be taxed twice?

Thanks.

MinhT1

Level 15

Vanguard is correct. However, you do not need to create a 2021 form 1099-R to report your excess contribution. In 2023, when you receive your two forms 1099-R, do not report the one with the excess contribution but keep it in your tax recordsOnly report the form 1099-R with your earnings on your 2022 tax return.

Here is what you should do:

Reporting excess salary deferrals (excess 401k contributions) returned to you after the end of the tax year but by April 15th of the following tax year on your 1040. Do not create your own 1099-R for this situation.

Pages 10 and 11 of IRS Pub 525 under Excess deferrals (the IRS term for 401K contribution is deferral) tells us to include the excess deferrals as income on line 1 of Form 1040 if the money was returned after the end of the tax year but by April 15th of the following tax year. You need to report only the excess contribution, not any money generated by the investment of the excess contribution. What you earned will be covered by a 1099-R for the following tax year and will be entered then as a normal 1099-R.

Below is how to do this in TurboTax:

Click on Federal in the left-hand column, then on Wages & Income
Under All Income, scroll down to Less Common Income
Select Miscellaneous Income and click Start
Select Other income not already reported on a Form W-2 or Form 1099 and click on Start
Answer the question "Did you receive any other wages? Yes
Click through the questions till you get to Any Other Earned Income
Answer Yes to Did you earn any other wages?
Indicate Other as Source of Other Earned Income and click Continue
For the description enter "2021 Excess 401K Deferrals" and click on Done

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Helen2014Author

Level 2

Thanks for your timely response.

If I do not report the $300 1099-R in 2023 for 2022 (so that I do not get double taxed) , will it cause any problem if my tax is audited? Thanks.

BillM223

Level 15

So long as the corrective distribution was (will be)made before April 18, 2022, you can ignore the 1099-R for the excess in 2022 (it will have a code of "P", I believe).

This is because the excess was already taxed in 2022 when you went through the steps Minh gave above to add 2021 Excess 401K Deferrals to Misc income.

Your excess can be doubly taxed (the second 1099-R) if you receive the corrective distribution after April 18, 2022, but since you are already going to have it taxed in 2022, you can ignore the second 1900-R.

Just keep all these notes in your tax file in case the IRS ever writes you about it.

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Zzzz5

Level 2

Thanks everyone for the advices. I have a similar tax situation where I overcontributed (in 2022) when switching companies. The excess was withdraw the following year (Feb 2023). I got a 1099-R in 2024 with code P in box 7. I read some other posts on this forum. The suggest was to amend prior year tax. But this post suggests that the correction can be done in the tax year when I received the form (2024). Could someone help me understand why the answers are different? Is it because of the $ threshold?

Example:https://ttlc.intuit.com/community/taxes/discussion/1099-r-code-p-what-to-do/00/1442903

If I follow the instructions here, 1) I do not need to amend my 2022 tax; 2) I do not enter the 1099-R (with code P) in my normal 1099-R section and 3) I would need to report the excess under "Miscellaneous Income" section. Am I correct?

Any advices are appreciated!

RobertB4444

Level 15

You are correct. Because this was income that should have been included in your W2 and has already had social security and medicare paid on it it is just added to your income for the year.

The reason that there are two answers is that the first was for you to have added it to your 2022 tax return in 2023 when you first received the refund. Since it wasn't added last year it can be added this year so that you have the income matching the form that you received.

@Zzzz5

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