How do you fix a mistaken deposit into an individual 401K that I am not qualified for.

[HL14]

I mistakenly deposited funds into an individual 401K that I am not qualified for on December 30, 2022. When I discovered this, I had the funds (along with the earnings) withdrawn (around February 2023) before the filing of the 2022 tax return.  For tax year 2023, I received a 1099-R showing the Gross distribution (Box 1) and Taxable amount (Box 2a) for the amount deposited in error with a distribution code (Box 7) "P" and the earnings portion with a distribution code (Box 7) "08".  I believe I should only be reporting (taxed) on the earnings while the funds were in the account.  Why would the taxable amount report the contributions that were withdrawn.  No deductions were taken for this contribution; however the trustee will not issue a corrected 1099-R.  What are my options?

[dmertz · Accepted solution]

The trustee of the account does not know if you deducted the contribution or not.  The code P on the 2023 Form 1099-R indicates that the amount needs to be reflected in the way that you filed the 2022 tax return, in this case by not deducting the contribution.  If the IRS questions your 2022 tax return, you'll just need to provide an explanation as you did in your post above.

As you said, report the only the code-8 2023 Form 1099-R on your 2023 tax return.  (I assume that the code-P Form 1099-R shows no tax withholding.)

[HL14]

Thank you for responding.

To clarify your response, there is no need to amend 2022 since no deductions were taken on the 2022 tax return and only report the excess earnings on the 2023 tax return.  You are correct, there were no tax withholdings associated with code "P".