Hi all,
(Note: My post was previously classified as Spam. I have no idea why. I will try rephrasing it and will try again.)
I noticed that in 2022 I over-contributed to my 401k because of a change of employers. Let me please describe the details below, and I will appreciate your help in understanding my options.
I am also including references to IRS publications that seem relevant for the community's benefit.
- I reached out to the first 401k account administrator and asked if contributions can be reversed, but they declined it citing administrative procedures.
- Reversing the second company's 401k contributions is pointless because even if it was possible, the second company did 401k-matcing. What I might gain in avoiding tax penalties, I'd lose by undoing the employer match, which would need to be reversed as well.
- I learned that I could withdraw the over-contributed amount (plus any capital gains) from any of the two accounts (I'd choose the first one since there was no employer match). Please, validate my understanding of the following:
-- If the money is withdrawn before the tax deadline, then I can avoid double taxation. In that case the over-contributed money would need to be taxed as 2022 W2 income, and the early withdrawal penalty would be avoided.
-- However, if I do this any time after the tax deadline, then the money (plus any capital gains) would be taxed as 2023 income (or whichever year I do the withdrawal) and I'd pay an additional 10% early withdrawal penalty.
Assuming this is correct, my next step is to understand what the applicable deadline is: several online forums imply that it has already passed on April/18. However, this IRS publication appears to say that the upcoming extended tax deadline is applicable:
"Publication 590-A (2022), Contributions to Individual Retirement Arrangements (IRAs)"
(Sorry, I included a link previously, but my post was classified as Spam. Please search for it. Search on page for the following subsection.)
Excess Contributions Withdrawn by Due Date of Return
You won’t have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw any interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions.
(I have filed for the tax extension.)
Which deadline applies will probably determine my next steps:
- If it passed, I will need to understand the consequences of withdrawing the over-contributed amount now vs. later.
- If there is still time, I will need to understand how I can compute the exact amount to withdraw to correctly account for capital gains (they are actually small capital losses this year).
I am looking forward to learning more.
Thank you!
