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Can I choose whether to withdraw an excess 401(k) contribution from a rollover IRA account or an active 401(k) account?

I changed jobs during 2016 and had excess 401(k) contributions of about $3000. The simplest thing would be to withdraw the excess from the plan of employer B but employer B matches contributions. Employer A didn’t match contributions so I would prefer to withdraw the $3000 excess from there. 

The wrinkle is that when I left employer A, I rolled over my 401(k) to a Vanguard rollover IRA account. Vanguard obviously knows what the earnings have been on the account since the date I rolled it over (9/1/2016) but does not know (as far as I can see) what the earnings were between the date of contribution and the date of rollover). I have the Vanguard form for IRA Excess Contribution removal. My question is in two parts:

1) am I allowed to choose which account to withdraw the money from or must it be employer B’s plan (because that’s where my contributions went over $18,000)?

2) will withdrawing the money from a rollover IRA account cause any particular complications, for example because of the difficulty of calculating earnings on the excess contribution?

1 Reply
Intuit Alumni

Can I choose whether to withdraw an excess 401(k) contribution from a rollover IRA account or an active 401(k) account?

You need to contact the plan administrator for employer B's plan as soon as possible. Because you already rolled over your contributions to employer A's plan, it's too late to make corrections.

Plan administrators for 401k plans tend to be slow-moving, and you must have your excess contribution plus interest withdrawn by April 18, 2017 in order to avoid penalties. The excess contribution will be added into your income for 2016, and you will pay tax on that amount (but not the interest).

Since you have not already withdrawn the excess contribution, you will receive a 1099-R reporting the withdrawal in 2017. You will pay tax on the excess interest in 2017.

If you fail to withdraw the excess contribution by the deadline, you will be taxed twice on that amount: once when you withdraw it, and again when that amount is distributed. If the excess is allowed to remain in the plan, then it will no longer be a qualified plan, which means you will have to pay tax on the earnings and then again on the distributions.

See below for a more thorough explanation and how to enter this in TurboTax.


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