401k Excess Contribution, mix of Roth and pre-tax

[Anonymous]

Hi, I made an excess contribution of $600 to due to a typo when entering my previous contributions when transitioning to my new employer. At my new employer, I've contributed more than $600 in Roth and the rest in pre-tax since I decided I would prefer pre-tax.

Since I've contributed to both Roth and pre-tax, I have a few questions:
1. Can I select to do an excess distribution of $600 and any earnings from just my Roth contributions?
2. Since Roth is after-tax, I assume I won't need to have my employer make any adjustments to my W2. Is this correct? If so, am I able to directly tell my plan administrator (Fidelity) and have them do the excess distribution, or should I be asking my employer this? I haven't told my employer yet because they've made some big hiccups in the past, and I'm afraid they won't understand that I want to do an excess distribution from my Roth and not my pre-tax, so I would prefer to work with Fidelity directly if possible.
3. Do I need to enter any information into TurboTax when I do my taxes next year? I will do the excess distribution this year to get it over with and avoid going into the next calendar year, and most likely I will not have any earnings by the time the excess distribution is done with the way the current market is.

[Critter-3]

@dmertz 

I am fairly certain that you are SOL  since this was not taken care of by the filing deadline of 4/18/22 but my buddy dmertz should be by to confirm that.  If so there is nothing you can do about it except pay the penalty for the excess on the 2021 return. 

[Anonymous]

I am talking about 401K for 2022, meaning filing taxes in 2023.

[Critter-3]

Ok ... that is a different story ... stop any further contributions and have the  excess contribution taken from one of the accounts by the end of the year.   Talk to the plan administrator for directions on how to do this. 

[Anonymous]

Yep already stopped it. Doesn't it depend on if I take the excess distribution from Roth or pre-tax? For pre-tax wouldn't I need to contact my employer for an updated W2? But for Roth I would only need to talk to my plan administrator?

[Critter-3]

Updated W-2 ???   2022 forms will not be issued until Jan 2023. 

You need to tell the employer that too much was contributed as well as  the plan administrator.  

[Anonymous]

Okay yes I mean W2 for 2022, released in 2023. And gotcha.

[Anonymous]

Can you elaborate on why my employer needs to know if I am going to be making the excess distribution from Roth though?

[Critter-3 · Accepted solution]

Because that affects the entry on box 12 ( codes D or AA)   of the W-2 so they need to know ... don't bank on the plan administrator to do this for you. 

[Opus 17]

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@Anonymous wrote:

Can you elaborate on why my employer needs to know if I am going to be making the excess distribution from Roth though?

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Your employer might not be able to change your W-2.  The W-2 reflects what they paid you.  They don't know what happened afterward and they can't vouch for your honesty (that you removed funds from one or the other account).   If the employer sent money to a qualified retirement plan under a salary reduction agreement, they can't pretend it didn't happen.  You might try asking HR if they can reverse the excess contribution for you.  If they can't, you should expect your W-2 to reflect what actually happened from the employer point of view, and you will report how you fixed the problem on your tax return.  

In fact there is no particular penalty for this situation.  The consequence of excess contributions is that you pay tax on the excess (if it was a deferred pre-tax contributions).  If you withdraw the excess prior to the filing deadline, then you pay exactly the same amount of income tax as before, it just means that now, you won't be paying double tax when you withdraw your retirement funds.  The consequence of withdrawing the excess is that you must also withdraw any gains and pay tax on it.

So if you contacted the broker (Fidelity) and said "I contributed $$$ excess to my Roth option 401(k) and I need to withdraw it" they should have sent you the $$$ amount plus any earnings. You will get a 1099-R that reports the total distribution in box 1 and the taxable earnings in box 2a, and you will pay income tax plus a 10% penalty on the earnings only on your 2022 tax return.  If the Roth account lost money, Fidelity should be sending you just the $$$ amount.  The 1099-B box 1 will have the gross amount and the taxable amount in box 2a should be zero. 

[dmertz]

There is no 10% penalty on the earnings distributed with a distribution of an excess deferral or excess Roth contribution from an account in a 401(k) plan.

Particularly since the corresponding tax year has not yet ended. the request to make the distribution of the excess should be done through the employer; the employer is likely the administrator of the plan.  As Critter-3 indicated, this will allow the employer to produce a W-2 that reflects the net contribution.  You should indicate that the excess adjusted for gain or loss should be distributed from the Roth 401(k) account even though, I think, that the excess is deemed to be in the Roth 401(k) account and should come from that account anyway.

[Anonymous]

Just to provide an update. My employer had no involvement and told me to work with Fidelity.

I received my 1099-R, and although the Roth excess was $600, it saw a loss of around 5%, so the gross distribution was only $570. Fidelity suggested I report the other $30 as a negative amount in the "Other Income" section when filing my taxes. I don't see how that would be reportable or what it would be classified as.

Also, from the IRS' perspective, I don't quite understand how this still wouldn't be an overcontribution by $30 (the amount not returned back to me).

[dmertz]

Don't confuse the amount distributed with the amount of contribution returned.  The amount of contribution returned was $600.  The loss-adjusted amount distributed to accomplish the return of the $600 contribution was $570.

[Anonymous]

Maybe I'm missing something, but how does the IRS correlate that this loss-adjusted amount distributed to me of $570 is related to the excess $600 contributed, as the 1099-R doesn't indicate the original $600 amount anywhere? Is this related to indicating the negative $30 as "Other Income" which Fidelity suggested (which I admittedly still don't understand how to enter this in TurboTax)?

[dmertz]

The IRS relies on the 401(k) plan to distribute the correct amount for the amount of contribution being returned.  Regardless, $600 is to be included as income on your tax return because that is the amount of the excess deferral that was originally excluded from box 1 of your W-2 (which would not have been had it not been deferred in the first place).

Whether not it is permissible to separately include a negative $30 entry as Other income is questionable.  Those who suggest this are relying on a ruling that pre-dates the establishment of miscellaneous deductions subject to the 2%-of-AGI floor under which this would probably normally be claimed.  Miscellaneous deductions subject to the 2%-of-AGI floor were suspended by the Tax Cuts and Jobs Act of 2017 until 2026.