401(K) excess contribution not fully withdrawn

[Johny2025]

Hi,

I am in a slightly odd situation with excess 401K contribution and withdraw that I'm hoping I can get some advice.

In 2023, one of us over contributed to 401(K) and Roth 401(K) due to changing jobs, say total over contribution was $3500. In 2024 tax season, we discovered the over contribution on the regular 401(K) side ($2000), but missed the over contribution on the Roth 401(K) side by $1500.  We requested custodian and withdrew the $2000 excess contribution in 2024 season, and received $2300 total ($2000 + $300 earnings) in 2024.

In the 2023 tax return filed by April 15 2024, we reported income unreported on W2 due to excess contribution of $2300 - I didn't understand if I should have included the earnings, so I did.

In April of 2024, we discovered the excess Roth 401(K) contribution, and tried to withdraw that also. However, the custodian couldn't process anymore as excess contribution withdraw.  By June of 2024, we withdrew the $1500 from Roth 401(K).

I have a few questions regarding the different portions:
1) For the $2300 that we reported as income in 2023 tax return, we received 1099-R with code P for $2000, and 1099-R with code 8 for $300 as the earnings. Based on reading many answers here, it appears that I can ignore the 1099-R with code P, but should include 1099-R with code 8 in my 2024 tax return.  Is this correct, or can I also ignore the $300 1099-R with code 8 since I had already reported in 2023 return?

2) For the $1500 Roth 401(K) withdraw, we also received a 1099-R with code 1 (ordinary distribution), and it indicated that $1400 was the Roth contribution, and $100 is earnings, and taxable portion is the $100.  How should I treat this 1099-R?  Do I just file it as it is?  Is there something I also need to do to further correct the 2023 excess contribution while seems like I'm still $100 over contributed.

My priority is to try to follow the tax code as closely as possible to avoid any problems that might trigger audit, and I'm less concerned about the small penalty tax that I might end up paying.  Turbotax unfortunately wasn't very clear and didn't provide alerts when I over reported the income in 2023.  I appreciate someone with some experience in this area for insights. 

[DanaB27]

1) Yes, you can ignore Form 1099-R with code P but you need to enter the Form 1099-R with code 8 on your 2024 return. You also need to amend your 2023 return to correct the amount of excess deferral to $2,000. Please see How do I amend my federal tax return for this year?

2) To clarify, you requested to withdraw $1,500 but you only received $1,400 from the Roth 401(k)? 

You might have to check with your custodian. 

 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 and again when you receive it as a distribution. You can't include the excess amount in the cost of the contract even though you included it in your income.

Since you failed to withdraw the excess by April 15, 2024 the excess becomes pre-tax money in the Roth 401(k), taxable upon distribution . Therefore your distribution from the Roth 401(k) should be a taxable distributions of this excess (and earnings attributable to the excess). Please check with the custodian.

[Johny2025]

Thank you!  

To follow up on #2, 

2) To clarify, you requested to withdraw $1,500 but you only received $1,400? 

You might have to check with your custodian. 

- The custodian sent us $1500 in June of 2024, and in the 1099-R we received this year it shows that $1400 was the Roth 401(K) contribution withdraw, and $100 is the earning that is taxable.

[DanaB27]

You should contact the custodian, you should have a taxable distribution of $1,500 plus any attributable earnings since you failed to withdraw the excess before April 15th, 2024. Also, if the distribution was from a Roth 401(k) then the Form 1099-R should have code 1 and B in box 7.

[dmertz]

That Form 1099-R doesn't make sense.

Code 1 indicates a distribution from the traditional 401(k) account, not a distribution from a Roth 401(k) account.  A distribution from a Roth 401(k) should have both code 1 and code B.  However, the fact that they show some amount as nontaxable seems to suggest that they knew that they were making a distribution from a Roth 401(k).  (I assume that there is no after-tax basis in the traditional 401(k) account).

I assume that the distribution was requested to be made from the old employer's Roth 401(k) because such a distribution is not permitted to be made before age 59½ or separation from service.

It's hard to know how they did their calculation of the taxable amount.  If they did make the distribution from the Roth 401(k) and simply omitted the code B from box 7, it seems that they might have simply been reporting it as an ordinary Roth 401(k) distribution where the account consisted of 93.333% contributions and 6.667% gains.  However, the first $1,500 and it's attributable gains distributed from the account are required to be taxed upon distribution.  If the account saw gains between the time of the contribution and the time of the distribution, the entire amount should have been shown as taxable and some amount of taxable attributable gain remains in the account.

After confirming that the distribution was actually made form the Roth 401(k), you could probably submit a substitute Form 1099-R (Form 4852) showing codes 1 and B in box 7 and showing the entire amount as taxable treating it as if there had been no attributable gains.  If the plan actually processed it as an ordinary distribution, that also means that they have reduced contribution basis in the plan by only $1,400, not $1,500, so they will also be reporting any future nonqualified distributions as slightly less taxable than they actually are.  At that time would be extremely difficult to figure out what amount of such future distributions should actually be taxed, so it probably would not be worth even trying.

[dmertz]

One other possibility:  Perhaps they treated the excess as being in the traditional account instead of in the Roth account (despite the tax code deeming the excess as being in the Roth account), and made a distribution of excess from the traditional account.  However, if that's the case, the entire amount should still be taxable, so the Form 1099-R is still wrong.