@dmertz wrote:
I interpreted that to mean that $6,000 was received in cash and $6,000 went to tax withholding for a total distribution of $12,000.
Could be. If there was a $12,000 over-contribution between 2 employers, the state, federal and the 10% tax could be close to $6000.
However,
Isn't it the case that if the taxpayer left the money in the 401k until retirement, they would pay income tax at that time but avoid the 10% penalty? By insisting on processing the withdrawal after April 15, it becomes a taxable distribution.
To be more specific: the taxpayer already pays income tax on the excess contribution on their 2022 tax return. If they left the money alone, they would pay income tax in retirement, with no penalty. By withdrawing the money now, they have it to spend now, but they pay income tax plus the penalty on their 2023 return.
Can they avoid the penalty if they reverse the distribution within 60 days and just let the money ride until they retire?
