Excess 401k contribution in 2017. I changed job in 2017 and after I inputted both W-2, I exceeded the 18k. I notified both plan administration and both don't let me withdraw the excess contribution. What should I do?
I also read the following from IRA, but don't get what that means:
"Excess not distributed. If you don't take
out the excess amount, you can't include it in
the cost of the contract even though you included
it in your income. Therefore, you are taxed
twice on the excess deferral left in the
plan—once when you contribute it, and again
when you receive it as a distribution. " - https://www.irs.gov/pub/irs-pdf/p525.pdf (Page 10)
If they allowed me to withdraw, I would follow the following link to fix the issue: https://ttlc.intuit.com/questions/3877165-excess-401k-contribution-in-2016-should-i-report-it-using-...
Basically, the quote you included form IRS Publication 525 is stating that if your excess 401(k) contribution is not taken out by the due date of your return, you will end up being taxed twice on the amount because they are not allowing you any type of basis when you are taxed the first time. So you are taxed on the excess contribution now AND when you take the money out in the future.
I would highly recommend talking to the plan administrators again and explaining the situation so that you can withdraw that money before April 17, 2018 and avoid the double taxation.
If you are able to withdraw the excess contribution in time, you can report the excess contribution on line 7 of your 2017 Tax Return without a Form 1099-R by following these steps:
Basically, the quote you included form IRS Publication 525 is stating that if your excess 401(k) contribution is not taken out by the due date of your return, you will end up being taxed twice on the amount because they are not allowing you any type of basis when you are taxed the first time. So you are taxed on the excess contribution now AND when you take the money out in the future.
I would highly recommend talking to the plan administrators again and explaining the situation so that you can withdraw that money before April 17, 2018 and avoid the double taxation.
If you are able to withdraw the excess contribution in time, you can report the excess contribution on line 7 of your 2017 Tax Return without a Form 1099-R by following these steps:
Note that, under these circumstances, neither employer is *required* to make a return of excess contribution and there seem to be many employers who will not.
That does seem like the case. Both of my employers are not letting me withdraw. What should I do? Are there other ways to fix this?
If the employers are uncooperative, there is nothing you can do. You'll pay taxes on the excess amount in 2017 and the money will again be taxed when distributed from your 401(k)s. Hopefully the amount of the excess was not substantial.
what does it mean by "distributed from you 401(k)s"? If employer don't cooperate, does that mean, I have to pay penalty every year till I retire and withdraw money?
No, there is no excess-contribution penalty on this in 2017 or any other year.
Someday you will make distributions from your 401(k)s. As TurboTaxRachelW indicated, the excess amount on which you paid taxes in 2017 is not treated as after-tax basis in your 401(k)s, so you simply pay taxes again on the same money when eventually distributed as part of a regular distribution.
I'm in the same situation. Let's say the overcontribution was $1000. Do you pay taxes the second time during distribution (at time of retirement) on that $1000, or is it also on the earnings? Thanks!
@paulnelsonee - Earnings in a 401(K) are always taxable when when withdrawn. The $1,000 just becomes part of the before tax contributions (even thought you have paid tax on it once already) so you will pay tax on the same $1,000 again when distributed - that is the penalty for failing to timely removing an excess contribution.
Thank you for the reply. I have a Roth 401K so taxes are paid upfront. What I'm trying to find out is if taxes will be paid on the principal of $1000 or earnings as well. For a Traditional 401K, I agree with you. I did a bit more digging. According to the IRS, it looks like I can have the funds removed and pay a 10% penalty: <a rel="nofollow" target="_blank" href="https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-limits-for-the-calendar-year-and-excesses-were-not-distributed">https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-limits-for-the-calendar-year-and-excesses-were-not-distributed</a>
Per that publication:
"For any distributions, attributable to elective deferrals designated as Roth Contributions, all distributions will be reported as taxable in the year distributed. Designated Roth contributions will have already been included in income in the year of deferral."
Which means that when distributed the amount of excess plus and earnings will be included in your income as taxable income.
The 10% is not an alternative. The 10% is an ADDITIONAL early distribution penalty in addition to the normal tax that applies if you are under age 59 1/2 at the time of the distribution for late distributions of excess contributions not withdrawn by the due date of the tax return.
Thanks for the reply. Understood that 10% is an additional early distribution penalty. Bottom line: I want to have the excess funds removed asap rather than leave them in the account, correct?
I think that correcting an excess Roth 401(k) contribution for 2017 needed to be done by April 15, 2018. I don't think that there is anything that can be done about it now unless the employer is required to make the correction.
I think it's still necessary to tell the employer about the excess contribution. According to the above-referenced IRS web page, the distribution of an excess contribution after April 15 is taxable even though it was a contribution to the Roth 401(k). The excess Roth IRA contribution does not add to the contribution basis. The consequences are the same as if the excess was an excess deferral to the traditional 401(k) account: double taxation of the excess contribution and a 10% early-distribution penalty on the distribution if made before age 59½. You can't make the withdrawal until you have a triggering event, either reaching age 59½, becoming disabled or leaving the company.
Had the distribution of the 2017 excess been done by April 15, 2018, none of the distribution, including the attributable earnings, would be subject to an early-distribution penalty. An early-distribution penalty on the earnings distributed with a return of contribution by the due date of the tax return only happens with a return of contribution from an IRA.
How do you file your taxes if the employer says they are not going to return the excess?
@2manydogs - The same way as above if you missed the date to have the excess removed or if you had two different employers then neither is *required* to return it. It just stays in the account and will be taxed again when finally distributed - in the mean time it can produce earnings in the account.
For information see IRS Pub 525 page 10 excess not removed.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p525.pdf">https://www.irs.gov/pub/irs-pdf/p525.pdf</a>
I have this issue for 2020 taxes where I have excess 401k contributions across 2 different 401k providers and both providers refuse to distribute the excess deferrals saying that excess deferral requests must be made before 4/15 even though the tax deadline was extended to 5/17 for 2020. A turbotax advisor said that I will be taxed 6% on the excess 401k contributions until I'm able to get a disbursement of the excess amount. Is that true? If so that's horrifying and would potentially cause me to pay more in taxes than I ever contributed in the first place.
@master_d wrote:
I have this issue for 2020 taxes where I have excess 401k contributions across 2 different 401k providers and both providers refuse to distribute the excess deferrals saying that excess deferral requests must be made before 4/15 even though the tax deadline was extended to 5/17 for 2020. A turbotax advisor said that I will be taxed 6% on the excess 401k contributions until I'm able to get a disbursement of the excess amount. Is that true? If so that's horrifying and would potentially cause me to pay more in taxes than I ever contributed in the first place.
You were given incorrect information. The 6% penalty applies to IRA's, not 401(k)'s.
Although this thread is several years old the tax law has not changed. You must still report the excess on your 2020 tax return as taxable wages, and has been said before in this thread, when you retire and take distribution it will be taxes again as ordinary income.
You do not pay more in tax than the contribution. Since the contribution was not included in your taxable wages you must include it now. That will increase your tax somewhat.
Excess 401(k) deferrals should be reported in:
(There are several screens to click through to get to the right place)
Miscellionious Income ->
Other Income not reported on a W-2 ->
Other wages (yes) ->
House Hold employee (Continue) ->
Sick Pay (Continue) ->
Other earned income (yes) (Includes excess salary deferrals)->
Source of income (other) ->
Any other income - enter the amount of the excess deferral and an explanation.
This will add the returned excess to your 2020 wages on line 1 on the 1040 form.
Cool thank you for the information. I actually don't mind paying taxes twice for this since the excess contribution resulted in the max company match and I couldn't have gotten there without an excess deferral
This rule can work two ways. Sometimes it is better to not remove the excess because removing it means the earnings must also be removed and are taxable in the year removed. The earnings (and future earnings) might be more than the tax. It can be an advantage to leave it all in the account.
I have same issue for my 2021 return. Basically both plan administrators don't let me withdraw. Since the excess is small it is OK for me to be taxed twice on the amount. Now my question is how to report the excess as taxable income tax for my 2021 return?
It seems that the instruction Rachel_W mentioned is for the case that "you are able to withdraw the excess contribution in time", because the quote is "If you are able to withdraw the excess contribution in time, you can report the excess contribution on line 7 of your 2017 Tax Return without a Form 1099-R by following these steps: ".
How to report 2021 tax using Turbo tax if the plan administrators don't let me withdraw?
Thanks!
@Ryan_us wrote:
I have same issue for my 2021 return. Basically both plan administrators don't let me withdraw. Since the excess is small it is OK for me to be taxed twice on the amount. Now my question is how to report the excess as taxable income tax for my 2021 return?
It seems that the instruction Rachel_W mentioned is for the case that "you are able to withdraw the excess contribution in time", because the quote is "If you are able to withdraw the excess contribution in time, you can report the excess contribution on line 7 of your 2017 Tax Return without a Form 1099-R by following these steps: ".
How to report 2021 tax using Turbo tax if the plan administrators don't let me withdraw?
Thanks!
If an excess and only one employer then that employer is required by law to return it, but if two (or more) employers and neither one created the excess with what they reported while you worked for that employer then neither one is required to return the excess although most will. If they don't then you are stuck with it which is not necessary bad since the excess remaining in the account can continue to grow.
Excess 401(k) deferrals should be reported in:
(There are several screens to click through to get to the right place)
Miscellionious Income ->
Other Income not reported on a W-2 ->
Other wages (yes) ->
House Hold employee (Continue) ->
Sick Pay (Continue) ->
Other earned income (yes) (Includes excess salary deferrals)->
Source of income (other) ->
Any other income - enter the amount of the excess deferral and an explanation.
This will add the taxable excess to your 2020 wages on line 1 as required.
@Ryan_us wrote:
I have same issue for my 2021 return. Basically both plan administrators don't let me withdraw. Since the excess is small it is OK for me to be taxed twice on the amount. Now my question is how to report the excess as taxable income tax for my 2021 return?
It seems that the instruction Rachel_W mentioned is for the case that "you are able to withdraw the excess contribution in time", because the quote is "If you are able to withdraw the excess contribution in time, you can report the excess contribution on line 7 of your 2017 Tax Return without a Form 1099-R by following these steps: ".
How to report 2021 tax using Turbo tax if the plan administrators don't let me withdraw?
Thanks!
If an excess and only one employer then that employer is required by law to return it, but if two (or more) employers and neither one created the excess with what they reported while you worked for that employer then neither one is required to return the excess although most will. If they don't then you are stuck with it which is not necessary bad since the excess remaining in the account can c
Excess 401(k) deferrals should be reported in:
(There are several screens to click through to get to the right place)
Miscellionious Income ->
Other Income not reported on a W-2 ->
Other wages (yes) ->
House Hold employee (Continue) ->
Sick Pay (Continue) ->
Other earned income (yes) (Includes excess salary deferrals)->
Source of income (other) ->
Any other income - enter the amount of the excess deferral and an explanation.
This will add the taxable excess to your 2020 wages on line 1 as required.
Similar situation here. I changed a job in 2021 and ended up excess Roth 401k contributions. Both providers refused to distribute the excess deferrals since it was passed 4/15/2022 when I requested. I understand from this discussion thread that I can 1) leave the excess there and pay tax when I withdraw after I retirement. 2) Take an early withdraw from the first company (since I no longer work there anymore) and pay 10% early withdraw penalty in 2022 and done with it. But what should I do for 2021 tax? There is no Miscellaneous Income to report since it was Roth 401K. Do I need to report the (unrealized) gain or loses, but where can I get that number from?