401K excess contribution - deadline to withdraw

Forum|Forum|5 years ago
April 22, 2021
2 replies
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I made an excess contribution to my 401K due to job change mid-year 2020. TurboTax is saying that I have until May 17th (tax filing date) to withdraw the excess funds from my account without incurring additional tax. However, ADP is saying that the deadline is April 15th and refuses to action the withdrawal. The IRS publication on this matter states April 15th, but we weren't sure if there was any latitude for interpretation since many similar issues seem to be tied not to the specific April 15th date, but to the tax filing date.

If we already missed the window for which we can do the reversal, then I guess we'll have to keep the excess contribution in the account and pay tax again in the year we receive the distribution as per normal with all the other funds that are in the 401K account?

macuser_22

Alumni - Champ

@shung wrote:

If we already missed the window for which we can do the reversal, then I guess we'll have to keep the excess contribution in the account and pay tax again in the year we receive the distribution as per normal with all the other funds that are in the 401K account?

Yes, April 15 was the last day the excess could be returned. You still must report it as an excess and pay the tax on the excess and will be taxed again when finally distributed. That is the penalty for missing the removal date. (The upside is because the security market has been strong, you actually might be money ahead with the excess still invested and earning income that might exceed the tax.)

Excess 401(k) deferrals should be reported in:
(There are several screens to click through to get to the right place)

Miscellionious Income ->
Other Income not reported on a W-2 ->
Other wages (yes) ->
House Hold employee (Continue) ->
Sick Pay (Continue) ->
Other earned income (yes) (Includes excess salary deferrals)->
Source of income (other) ->
Any other income - enter the amount of the excess deferral and an explanation.

This will add the returned excess to your 2020 wages on line 1 exactly the same way that the 1099-R would. The only information that is sent to the IRS is the line 1 amount.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

shungAuthor

Level 2

Thank you for the clarity of your response. I did follow the guidance to report the excess as income in my 2020 tax return.

I guess TurboTax should update their Help guidance to say April 15th (and not May 17th!) as the deadline for withdrawing the excess funds.

macuser_22

Alumni - Champ

@shung wrote:

Thank you for the clarity of your response. I did follow the guidance to report the excess as income in my 2020 tax return.

I guess TurboTax should update their Help guidance to say April 15th (and not May 17th!) as the deadline for withdrawing the excess funds.

Where does TurboTax say that about 401(k) excess? May 17 is the last day that excess *IRA* contributions can be returned.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

Balak

Level 2

I’m in the same situation. My brokerage refused to process any excess since it’s past April 15. I have over $2200 in excess. Researching the potential tax consequence, it appears there would be a double taxation on the excess. Various articles and resources also talk about a 6% penalty per year being assessed for each year the excess remains in the account. Can someone please clarify this?

Quoting one of the articles from a CPA’s website below-

“The penalty for excess contributions is 6%. If you remove the excess amount prior to the end of the tax year, you will not be assessed a penalty. In other words, there is good news in that you might have a chance at avoiding this 401(k) penalty if you get the excess contribution out of your account before the tax deadline for the year it was contributed.”

macuser_22

Alumni - Champ

@Balak wrote:

I’m in the same situation. My brokerage refused to process any excess since it’s past April 15. I have over $2200 in excess. Researching the potential tax consequence, it appears there would be a double taxation on the excess. Various articles and resources also talk about a 6% penalty per year being assessed for each year the excess remains in the account. Can someone please clarify this?

Quoting one of the articles from a CPA’s website below-

“The penalty for excess contributions is 6%. If you remove the excess amount prior to the end of the tax year, you will not be assessed a penalty. In other words, there is good news in that you might have a chance at avoiding this 401(k) penalty if you get the excess contribution out of your account before the tax deadline for the year it was contributed.”

It is not clear what type of account you are talking about.

The subject of this thread is an employer 401(k) plan, not a brokerage account. A 401(k) never has a 6% penalty. For a 401(K) the excess is reported on the 1040 line 1 for the year of the excess as I indicated in a previous post. After April 15 of the following year it stays in the account if not removed before that date. When you retire that amount will be taxed again as ordinary income - that is the penalty for not removing before April 15.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

Balak

Level 2

Sorry for the confusion. I’m talking about excess contribution on the 401k. By brokerage I meant Fidelity. There are plenty of online articles that mention 6% penalty if the excess is not removed before April 15. TurboTax pop up also mentioned this 6% penalty if the excess is not removed before the tax day. It is not clear if this 6% penalty would only be one time OR each year until the excess stays in the account?