earnings before withdrawal of excess funds

[gotbits]

I made a mistaken contribution to my solo 401(k) and I need help figuring out how to deal with the correction.

Dec 27, 2017 I contributed $13,000 to my solo 401(k) at eTrade.

When I figured my taxes in April 2018, I decided that move was a mistake and wanted to remove the entire amount. I was told to request a Withdrawal of Excess Funds to Third Party to send the money back to where it came from. The money was eventually transferred back after many hoops were jumped.

However, during the 4 months the money sat in the 401K, it earned $357. eTrade eventually issued me a 1099-R. It shows a gross distribution of $13,357, and the taxable amount is $357 with code P (return of contribution taxable in 2017).

Since the earnings mostly accrued over 4 months in 2018 (not much during the four days of 2017), I thought this $357 would go on my 2018 tax return, which I'm working on now. But Turbotax (Home Biz 2018) tells me I should amend my 2017 to reflect this $357.

Assuming that's the right thing to do, is amending my 2017 straightforward? How would I proceed? Thanks very much for any help!

[macuser_22]

The 1099-R does not sound like it is correct.   The returned contribution itself would be reported as wages on the 2017 tax return since that is the year that the contribution was made.  Entering the code "P" in the 2017 program  will ask which year the 1099-R if for.  When you say 2018 then it will apply the box 1 amount as line 7 wages on the 2017 1040 form.  Box 2a should not have the earnings since the earnings were not returned in 2017.

However, any earnings that were returned in 2018 must be reported on the 2018 tax return and the financial institution should have issued a separate 1099-R with a code "8" in box 7 and the earnings in box 1 and 2a to report on your 2018tax return.

See IRS Pub 525 page 10 that explains this.
https://www.irs.gov/pub/irs-pdf/p525.pdf

[dmertz]

Was the contribution actually excess or was it a permissible contribution but you just decided it wasn't in your best interest?  If it wasn't actually an excess elective deferral, I think that elective deferrals are irrevocable, so I'm not sure that you were permitted to just "undo" the contribution and it should instead be treated actually contributed and as a regular distribution despite the coding on the Form 1099-R.  But I suspect that the IRS is unlikely to catch that and the IRS is likely to just go by the coding on the Form 1099-R.

As a return of excess deferral, I agree that there should have been two 2018 Forms 1099-R, one code P for $13,000 with $0 taxable and one code 8 for $357 with $357 taxable.

[gotbits]

The truth is I decided it wasn't in my best interest. Etrade had told me before I made the transfer it would be simple for me to change my mind and withdraw the funds before tax filing time (WRONG), and I think because of that error, they recoded the employer portion of the contribution in a way that made it possible to remove all the funds and return them to me (they recoded all of it as employee contribution, and therefore it was all excess contribution.)

Unfortunately, I don't understand the ins and out of this fiasco. It's a piddly amount of earnings, and I would be happy to report $357 as ordinary income or capital gains in either tax year. But I don't want my returns flagged for audit for 401k irregularities. And I don't have an accountant. My sole prop doesn't need one, except for this mess 🙂