Guidance Needed: Exceeding the 2024 401(k) Contribution Limi

[th1nkannie]

What steps should I take if I exceeded the 2024 401(k) contribution limit of $23,000 when I file my taxes?

[MAK70]

You do not pay a penalty for an excess deferral. But if you do not take out the excess amount by April 15th, then you are taxed twice on the excess deferral left in the plan. This happens once when you contribute it (with the steps below) and again when you receive it as a distribution (reported on Form 1099-R). You can't include the excess amount in the cost of the contract even though you included it in your income.

You must include the excess deferral in your wages in the year the excess deferral happened. 

1. Login to your TurboTax Account 
2. Click "Federal" from the left side of your screen
3. Scroll down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
6. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
7. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
8. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
9. On the "Any Other Earned Income" screen enter "2024 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

[LindaS5247]

You are correct The most you could contribute to a 401(K) plan for 2024 was $23,000.

If you are 50 or older, you can make catch-up contributions of an additional $7,500 per year in both 2024 and 2025. Your plan would have to allow for these catch-up contributions and they would have to be made prior to the end of the plan year.

If you can catch the over-contribution problem before April 15 and before you file your taxes, you can get a corrected W-2 to use.

You should inform your Employer/Plan Administrator as soon as you realize you have made an over-contribution. Your Plan Administrator should provide you with any forms and help that you will need.

Your Employer/Plan Administrator will return the excess money to you as well as any interest that money earned

The excess that you deferred will be treated as income in the year they are made.

If you can fix the error before April 15, 2025 deadline, the correction is much easier.

You’ll need to file your taxes using the updated W-2 and you’ll have to pay taxes on the overcontribution as if it were wages. Your corrected W-2 would show these wages.

if you miss the deadline, you’ll owe those additional taxes and you may have to pay a 10% early withdrawal penalty on the amount.

Then you will owe additional taxes again in the year it was corrected (likely 2025).

If you didn’t catch the over-contribution early enough, you’ll still follow these steps, but you’ll would have to to file an amended tax return

Click here for "Retirement topics - Catch-up contributions"

[ernie563]

The problem I have is (1) I caught the excess before April 15, (2) I contacted my 401K company before April 15 (actual date April 9), (3) they withdrew the proper amount from my account on April 9, and (4) and I received a physical check for the proper excess amount on their check dated April 10. HOWEVER, they classified it as an in-service withdrawal, charged me a $35 processing fee and withheld Fed taxes (which didn't seem right). Then later (after April 15) they called me to inform me that it is consider a "in-service withdraw" and not a "return of excess deferred amount". Should I be concerned? If so, what are my options? 

[RobertB4444]

An in-service withdrawal is just a distribution from your retirement plan.  Which means that it will show as a taxable distribution on your 2025 taxes.  I don't understand why they couldn't classify it as a return of excess contribution which would just mean that it was standard income.

You have a couple of options here.  You can enter it in this year's tax return as a return of excess contribution using the instructions @MAK70 gave you above.  Then, on your 2025 return, you would only enter the tax withheld onto your return since you have already entered the amounts from the 1099-R that you will receive.

This may result in questions from the IRS since the 1099-R will have a different code than you are expecting.  However, you should have all of the emails between you and the financial management company that you can present to the IRS as proof that you requested and received the amount prior to the due date of the return.  

That option is attractive because it's the cheapest.

The other option is to say that you did pull the money out by the due date of the return this year but not include it in income for 2024.  Instead you will enter the 1099-R as it is presented in 2025 and pay taxes and a penalty on it at that point.  

That option is attractive because the forms will match.  But the 10% penalty for early withdrawal will apply.

@ernie563