Over-Contributed to a 401K

[user17580792719]

When my wife switched jobs in mid- 2024, her 401K contributions under the new employer, combined with her contributions under the  former employer  surpassed the allowed amount. I filed an extension and paid an estimated amount. What forms and steps are required to complete our joint 2024 filing?

[MarionH]

• To correct your wife's excess 401(k) deferral, contact her plan administrator to withdraw the excess contribution and any earnings. Be sure administrator knows this reason for withdrawl as it affects the distribution codes for the 1099-R.  These funds will be distributed back to her.

  Because the correction occurs after April 15th, the excess amount will be subject to double taxation:

  • Taxed in 2024: For the year the excess contribution occurred.
  • Taxed in 2025: When the distributed funds are received, and a 2025 Form 1099-R is issued.

  Steps to Report the 2024 Correction in TurboTax:

  1. Log in to your TurboTax account.
  2. Select Federal on the left menu.
  3. Scroll to Less Common Income, then click Show More.
  4. Choose 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, select Yes and click Continue.
  7. Continue to the "Any other earned income" screen, select Yes, and click Continue.
  8. On the "Enter Source of Other Earned Income" screen, select Other and click Continue.
  9. On the final screen, enter:
     • Description: "2024 Excess 401(k) Deferrals"
     • Amount: The excess contribution
  10. Click Done to complete the entry.

  This process will ensure the excess deferral is included in your 2024 wages as required.

  @user17580792719 Thanks for the question!!

[K M W]

Overcontributing to a 401(k) is a serious issue that can lead to double taxation and penalties. Unlike an IRA, where you can correct an excess contribution yourself with a recharacterization, a 401(k) is an employer-sponsored plan, so the correction process is a bit different and usually involves your employer or plan administrator.

Overcontributions to a 401(k) most often happen in these situations:

• Multiple Employers: You change jobs during the year and contribute to 401(k) plans at both employers. The combined contributions exceed the IRS limit.

• Late in the Year Bonus or Raise: You have a fixed percentage of your salary contributed, and a large bonus or raise late in the year pushes your total contributions over the limit.

• Working Multiple Jobs: If you have more than one job with a 401(k) plan, you might not be tracking the total contributions across both.

The IRS sets an annual elective deferral limit. For 2025, the limit is $23,500 for those under age 50, with an additional $7,500 catch-up contribution for those age 50 and over.

If you overcontribute, the consequences depend on when you catch the mistake.

• If You Catch the Mistake Before April 15th
  • You must notify your employer/plan administrator immediately. They are responsible for processing the correction.
  • They will return the excess contribution to you. This is called a "corrective distribution."
  • You will also receive any earnings or losses that were attributable to the excess contribution.
  • Tax Implications: The excess contribution amount is considered taxable income for the year you made the contribution. The earnings on the excess contribution are also taxable income, but they are taxed in the year you receive the corrective distribution. The 10% early withdrawal penalty (if you are under age 59½) does not apply to the corrective distribution.
• If You Miss the April 15 Deadline

  • Double Taxation: The excess contribution is taxed twice: once in the year you made the contribution (it was mistakenly excluded from your income) and again in the year you finally withdraw it.

  • Potential for Penalties: You may also be subject to a 10% early withdrawal penalty on the distribution if you are under age 59½, as the correction is no longer considered "timely" by the IRS.

Unfortunately, the IRS deadline to correct was April 15, 2025, regardless of whether you filed an extension or not. 

The steps you want to take as soon as possible: Your wife will need to contact one of the employers, explain the situation and have the 2024 excess contributions returned to her. Your 2024 tax return will include that amount as income, and your 2025 return will also include that amount (and any earnings on that amount) as income, along with potentially the 10% penalty depending on your wife's age.