Excess 401k contribution (excess salary deferral) in 2016 (changed job). Missed April deadline to withdraw. Filed extension - ready to file but confused by next step...

[kevin.s]

TurboTax says I should report the excess deferral amount in a 1099-R in boxes 1 and 2a, and use code P in box 7. However box P says "return taxable in 2015" which I don't  believe is correct. Can someone please advise how to correctly complete the the 1099-R or if there is anything else that I need to report?  I have been reading conflicting reports that I should not even use 1099-R.Thank you!

[dmertz · Accepted solution]

If you missed the deadline to withdraw (and, consequently, the excess deferral has not been withdrawn), you must include the excess amount in income. No Form 1099-R is involved.  You do this by doing the following:

1. Go to Wages & Income -> Less Common Income -> Miscellaneous Income, 1099-A, 1099-C.
2. Click Other income not already reported on a Form W-2 or Form 1099.
3. Answer Yes, you received other wages.
4. Proceed to the Any Other Earned Income page and answer Yes.
5. On the Enter Source of Other Earned Income page, select Other and click Continue.
6. Enter "Excess salary deferring" in the description and enter the amount.

TurboTax will include the amount as wages on your tax return.

(If you did take any money out of a 401(k) in 2017, that distribution is a regular distribution unrelated to the excess contribution and will be taxable and potentially subject to an early-distribution penalty on your 2017 tax return.)

[kevin.s]

Thank you for the very swift reply! It is much appreciated.

One more question. I will now report as suggested on my 2016 return.  Am I OK to leave the money where it is or should I go ahead and withdraw it even though it is outside the dealine? I.e. will it causes problems later if I leave it there?

Many thanks again!

[dmertz]

There is little point to taking the money out now since it can only be taken out as a regular distribution (which would generally mean that it would have to be taken out of your previous employer's plan.).  Your effective penalty for the excess contribution will be that the excess will be taxed again when it's eventually distributed.  Because the excess was not the result of any one employer permitting an excess contribution when only the deferrals to that employer's plan are considered, the employer does not risk disqualification of their plan (per recent IRS guidance).

[kevin.s]

Thank you!

[di_c0a8f28200012]

Hi, I have a similar situation.  I have not done my taxes for several years (still within 3 years) since I'm lazy and owed a refund (for all the years).  As I was catching up on them this year I noticed in 2015 since I changed jobs that year there was a Excess 401k contribution (excess salary deferral).  So, it being the year 2018 I have not withdrawn any excess contribution from then.  Am I suppose to do a 1099-R, or follow the above mentioned procedure?  If the above procedure, which tax year do I do that procedure in?  What are the tax implications?  Please let me know if I left any crucial details out.  Thanks again!!

[dmertz]

You must include the excess deferral as income on your 2015 tax return as described in the answer above.  This additional income will be taxed as ordinary income, the same as if it was originally included in box 1 of your W-2.

[di_c0a8f28200012]

Thanks so much!  I’m guessing once I do this I don’t have to do anything else in future years - 2016 onwards or anything special when I withdraw?

[di_c0a8f28200012]

Thanks so much!  I’m guessing once I do this I don’t have to do anything else in future years - 2016 onwards or anything special when I withdraw?

[dmertz]

There will be nothing special that you need to do when you eventually take a distribution from the 401(k).  This money will be taxed again at that point, which is effectively the penalty.

[di_c0a8f28200012]

Thanks again!

[sleung1979]

Hello - I apologize for waking this thread from the dead. But I find myself in the same situation this year. I understand that you previously stated that it doesn't make much sense to make a withdrawal of excess deferral (after the deadline). Ideally, I want to do as little as possible while also minimizing tax implications. Based on your earlier response, I understand that I will have add the excess deferral to my taxable income on this year's (2020) tax return and I will be subject to that amount being taxed upon eventual withdrawal (let's say when I do retire). However, my concern is around the excise tax that talks about it being a penalty for "every year the excess contribution remains in the plan". Could you help me understand the excise tax more? When I read that, it leads me to think I will be penalized (let's say 6%) for every year from now until I withdraw in retirement, which is obviously a hefty penalty. Am I misinterpreting that?