Excess 401K ROTH contribution

[Sam726]

Hello,

I changed employers in 2021 and overcontributed to my Fidelity ROTH 401K by $3000. I found this recently while preparing my tax returns. Company says it is too late to write a check returning the amount. What are my next steps?

1. Fill the ROE form from Fidelity (https://workplaceservices.fidelity.com/bin-public/070_NB_PreLogin_Pages/documents/ReturnofExcessCont...)

2. How do I estimate interest accrued on the excess contribution and do I need to show that?

3. How do I modify my return to account for this?

Appreciate any help I can get.

Thanks,

Shringi 

[DanaB27]

Usually, the plan administrator has time until April 15th to make corrective distributions.

If you withdraw it in time you will not have to add the excess to your 2021 wages since it was after-tax money. The earnings will have to be included on your 2022 return.

2022 Forms 1099-R will be issued reporting the excess:

• Form 1099-R with code P in box 7 can be ignored if you withdraw it before or on April 15, 2022, since you don’t add this amount to your wages.
• The earnings on Form 1099-R with Code 8 in box 7 should be reported in 2022.

Please see Pub 525 for additional information.

[Edited 3/28/2022 | 3:30pm PST]

@Sam726 

[Sam726]

Thank you.

Do I need to reduce my 401K contributions next year to adjust for this excess contribution?

It seems from your reply that I have nothing more to do except report 1099-R in next years returns (?)

Thanks.

[dmertz]

From Treasury Decision 9324 IRS 2007-22 I.R.B. 1302:

Designated Roth Contributions as Excess Deferrals

Even though designated Roth contributions are not excluded from income when contributed, they are treated as elective deferrals for purposes of section 402(g). Thus, to the extent total elective deferrals for the year exceed the section 402(g) limit for the year, the excess amount can be distributed by April 15th of the year following the year of the excess without adverse tax consequences. However, if such excess deferrals are not distributed by April 15th of the year following the year of the excess, these final regulations, like the proposed regulations, provide that any distribution attributable to an excess deferral that is a designated Roth contribution is includible in gross income (with no exclusion from income for amounts attributable to basis under section 72) and is not eligible for rollover. These regulations provide that if there are any excess deferrals that are designated Roth contributions that are not corrected prior to April 15th of the year following the excess, the first amounts distributed from the designated Roth account are treated as distributions of excess deferrals and earnings until the full amount of those excess deferrals (and attributable earnings) are distributed.

What this says is that if you fail to obtain a distribution of this excess by April 15, 2022, the excess becomes pre-tax money in the Roth 401(k), taxable upon distribution (whether or not the distribution would otherwise be a qualified distribution).  No matter when you take them, the first distributions that you take from the Roth 401(k) will be taxable distributions of this excess (and earnings attributable to the excess) until all of the excess and attributable earnings have been distributed.  Because the attributable earnings must be distributed, failing to make the correction timely would create a real accounting mess.  It's doubtful that the plan would be of any help in tracking the excess and the attributable earning, unless by notifying the plan they segregate the excess and attributable earnings into a separate subaccount.

Also see CFR 1.402A-1 Q&A-2(c):  https://www.law.cornell.edu/cfr/text/26/1.402A-1

No, there is no provision in the tax code to treat the excess as part of a subsequent year's contribution.

[Sam726]

Thank you.

In the Return of Excess Contribution form it is asking for Tax Withholding, with a default rate of 10%. Is this applicable in my case (ROTH 401K) or should I check "Do not withold federal/state tax"?

[DanaB27]

It depends on how high your earnings were. If you didn’t have a lot of earnings and believe you have enough other tax withholdings, then you can select not to withhold federal/state tax on an excess contribution.

Please see Underpayment of Estimated Tax for additional information.

[dmertz]

Gains included with a distribution of an excess contribution from a Roth 401(k) are taxable on the tax return for the year in which the distribution is made.  It's up to you as to whether you want to have any taxes withheld.  If the gain is relatively small or there is a loss, simplest would be to decline withholding, particularly if you typically get a refund from filing your tax returns.

[JoeM4]

I have the same issue with over contributing to 401K in 2021.  For my first employer my contribution was pre-tax.  For my second employer it was all Roth 401K.  I received the corrective distributions last week from Fidelity for the over contribution from my second employer (all Roth).  My current employer will not send me a corrected W-2.  Can I update the value for my W-2 line 2b to show my corrected 2021 Roth contributions?

If I use the original W-2 value, it completes the mini-worksheet for excess deferral and adds my pre-tax 401K amount from my first employer to my 2021 income.  If I can't correct the W-2 line 12 amount, what should I do? 

Thanks,

Joe

[RobertB4444]

You can adjust the amount on your W2 to the corrected amount and just hold on to the documentation that showed you took out the excess.

If you leave the amount on your W2 alone then the system should ask you if you removed the excess before the end of the year.  Just tell it yes and TurboTax will generate an 8606 that shows the contribution and the withdrawal of the excess.

[namanrg]

I am facing this issue in 2024 tax filing. I contributed for 2024 in Roth 401k and Traditional 401k. The withdrawal took place before April 15 in Feb 2025. The provider withdrew my excess contribution from my Roth 401k and noted it as Non-Taxable, and a small additional amount which they have identified as Taxable.

Do I need to reduce the contributed amount in W2?   

Since this was Roth withdrawal, do i just report the Taxable amount as other earnings?

[DaveF1006]

No, you don't need to reduce your W2 amount. As far as the withdrawal, wait until 2025 when you receive a 1099R for the withdrawal. The taxable amount will be reflected on the 1099R.