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helpnikki
Level 1

Do I need to pay taxes twice since i have excess 401K deferral in 2021 and missed the April 14th deadline

Turbo tax examples state that I report the excess contributions as 1099-R for 2021 and ignore it in 2022. But the posts online talk about paying taxes twice. Are the examples in Turbo tax incorrect?
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Opus 17
Level 15

Do I need to pay taxes twice since i have excess 401K deferral in 2021 and missed the April 14th deadline

The "pay twice" means once on your tax return, and again whenever you withdraw the money (usually in retirement).

 

Let's think about an IRA first.  With a traditional IRA, you get a tax deduction for your contributions.  Since the money is not taxed on deposit, all the funds are taxed on withdrawal.  But suppose you deposited $10,000 without taking the tax deduction (after-tax contribution; there are reasons you might do this but they are uncommon).  Now you are ready to retire and you have $100,000 in your IRA.  If you withdraw it all, you pay tax on only $90,000, because $10,000 was already taxed. 

 

With a 401k, that is not allowed.  If you make an excess contribution, the excess is added back to your taxable income, so it is an after-tax contribution.  But you don't track the after-tax contributions separately, and all your withdrawals are taxed when you retire.  So that amount of money was taxed on your income in the year you earned it, and will be taxed again whenever you withdraw it.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*

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2 Replies
dmertz
Level 15

Do I need to pay taxes twice since i have excess 401K deferral in 2021 and missed the April 14th deadline

Because your employer excluded the excess elective deferral from the taxable amount in box 1 of your 2021 W-2, you have to add it back to income on your 2021 tax return, so it is taxed on your 2021 tax return and does not create after-tax basis in your 401(k).  The same money will be taxed again by reporting it as a regular distribution when eventually distributed from the 401(k).  If that distribution occurs in 2022, it must be included on your 2022 tax return, otherwise that distribution must be reported on the tax return for whatever later year in which the distribution occurs.

Opus 17
Level 15

Do I need to pay taxes twice since i have excess 401K deferral in 2021 and missed the April 14th deadline

The "pay twice" means once on your tax return, and again whenever you withdraw the money (usually in retirement).

 

Let's think about an IRA first.  With a traditional IRA, you get a tax deduction for your contributions.  Since the money is not taxed on deposit, all the funds are taxed on withdrawal.  But suppose you deposited $10,000 without taking the tax deduction (after-tax contribution; there are reasons you might do this but they are uncommon).  Now you are ready to retire and you have $100,000 in your IRA.  If you withdraw it all, you pay tax on only $90,000, because $10,000 was already taxed. 

 

With a 401k, that is not allowed.  If you make an excess contribution, the excess is added back to your taxable income, so it is an after-tax contribution.  But you don't track the after-tax contributions separately, and all your withdrawals are taxed when you retire.  So that amount of money was taxed on your income in the year you earned it, and will be taxed again whenever you withdraw it.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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