How to correctly report overcontribution to 401k, which was corrected before year end?

If you removed the 2024 excess deferral in 2024, your 2024 Form 1099-R should have code 8 in box 7.  Income earned on an excess deferral will also be reported on Form 1099-R with code 8.

 

Code P is issued when you remove the 2024 excess in 2025 by April 15.

 

You only need to enter the Form 1099-R and TurboTax will  add it to your wages and report it correctly on line 1h on Form 1040.

 

Please see Pub 525 additional information.

 

Thanks for clarifying.

 

After adding my 1099-R, only the gain seems to be added as income. The principal is somehow flagged as tax free.

 

For context, the contribution was Traditional 401k. But on my form, line 2a (taxable amount) shows the gain only. There is also a footnote that says:

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Box 2a may not be your actual taxable amount since after-tax contributions and outside accounts can have an impact in determining the taxable portion of your distribution. Please speak to your tax advisor for assistance in determining if part or all of your distribution is taxable.

It seems like your Form 1099-R isn't correct if it only shows the gains in box 2a. Form 1099-R instructions state: "Corrective distributions. Enter in box 2a the amount of excess deferrals, excess contributions, or excess aggregate contributions (other than employee contributions or designated Roth contributions)."

 

Since this was a 2024 excess deferral removed in 2024 both the excess deferral and the gains need to be added to your wages on line 1h.

 

You can add the excess deferral amount to line 1h with the steps below:

 

1. Login to your TurboTax Account 
2. Click "Wages & Income" (under Federal) on the left side of your screen
3. Scroll  down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
6. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
7. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
8. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
9. On the "Any Other Earned Income" screen enter "2024 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

Great. Thanks for your help.

 

Does this mean I should delete my 1099-R from my return and replace it with you new way of reporting, or I should still keep that 1099-R?

You would still keep the Form 1099-R to report the gains. You can check Form 1040 line 1h to make sure it has the excess deferral plus gains reported.

 

To preview Form 1040 in TurboTax Online:

 

1. Click on "Tax Tools" in the left menu
2. Click "Tools"
3. Click "View Tax Summary" in the Tool Center window
4. Click on "Preview my 1040" on the left