I want to pay the extra tax and penalty for 401k overcontribution

You need to ask for the return of the excess contribution by April 15, 2021. Otherwise, you will incur an excise tax of 6% every year the excess contribution remains in your account. 

 

Reporting excess salary deferrals (excess 401k contributions) returned to you after the end of the tax year but by April 15th of the following tax year on your 1040.  Do not create your own 1099-R for this situation.

 

Page 10 of IRS Pub 525 under Excess deferrals (the IRS term for 401K contribution is deferral) tells us to include the excess deferrals as income on line 7 of Form 1040 if the money was returned after the end of the tax year but by April 15th of the following tax year.  You need to report only the excess contribution, not any money generated by the investment of the excess contribution.  What you earned will be covered by a 1099-R for the following tax year and will be entered then as a normal 1099-R.

 

Below is how to do this in TurboTax:

• Click on Federal in the left-hand column, then on Wages & Income
• Under All Income, scroll down to Less Common Income
• Select Miscellaneous Income and click Start
• Select Other income not already reported on a Form W-2 or Form 1099 and click on Start
• Answer the question "Did you receive any other wages?  Yes
• Click through the questions till you get to Any Other Earned Income
• Answer Yes to Did you earn any other wages?
• Indicate Other as Source of Other Earned Income and click Continue
• For the description enter "2020 Excess 401K Deferrals" and click on Done

Thank you so much, I really appreciate it.

One more question please.  Who do I ask for the return of excess contribution?  I asked my employer and they said they would not return it as it was not their fault and they will not send an amended W-2. Would I go to my 401k plan/provider and ask them for a payout before April 15 (and would this be considered a distribution)?

Thank you

Aroon

Hello @MinhT1 , your previous reply was very helpful.  Thank you very much for that.  

I received my Excess Deferral check today.  

They have broken it down into 3 parts: For argument's sake, let's say the Excess Deferral is $100.  They also returned the employer's match of $20. And then the income on the contributions which is $10.  So let's say a total of $130.

Based on your original reply, the $10 income will go on the 2021 return only.

But what about the return of the employer's match of $20?  Does that go along with the $100 Excess Deferral onto my 2020 return for a total of $120?  Or is the Employer Match not related at all as it had nothing to do with the $19500 individual contribution max?

Thank you again!

Aroon

There is no 6% excess-contribution penalty on an excess 401(k) elective deferral.  If not corrected by the deadline, the penalty is that money used to make the excess contribution is taxed twice, once on the tax return for the year in which the elective deferral was made and again when the money is distributed from the 401(k).

Reply from "Employee Tax Expert" is incorrect.

 

As above post, 6% penalty only applies to IRA excess contributions. For 401K, it's double tax situation for any excessive contributions that were not withdrawn by Apr 15 (or last tax day)

clearly, it is to your advantage to overcontribute to 401k or Roth IRA, if you believe you can make your tax-deferred account(s) grow.

In the case of Roth, after the due date with extensions for the year of over contributing, you never have to remove the growth.

I am similar situation where I have over-contributed nearly $1000 extra in 401K contributions in 2021 due to employer change.

 

Today is 8th of April and even though I will notify my employer to return the excess contribution, it may not happen by 15 April. They have 401K with Vanguard and the last date to notify Vanguard for this excess contribution was 15th March (which I missed). I called Vanguard and they are saying they cannot do anything now and suggested I talk to a tax expert. 

 

What options do I have in turbo tax if my employer is not able to return that extra contribution, their matching contribution, and any possible income generated on that extra contribution?

 

 

If the return of excess contribution cannot be completed timely, there are no options.  You must include the excess contribution in income on your 2021 tax return and the excess will be taxed again later when you make distributions from the 401(k).  This double taxation is effectively the penalty for not being able to correct the excess.

Appreciate the info here and hoping to clarify a few things.

 

Our scenario: spouse changed jobs in 2021 and over-contributed to 401K. We didn't realize until it was too late to fix, so we reported the excess as miscellaneous income on 2021 return.

 

1. Do we have to take any action to have this distributed back to us before normal retirement age?

 

2. Is there any additional penalty (on top of the tax we will pay for 2021) for not having it distributed to us until then? Are all of the posts referencing annual 6%/10% excise taxes and/or 10% early withdrawal fees mistaken?

 

3. If the excess amount (+ returns) is distributed back to us at some point going forward before retirement age, how will that be handled in that tax year? And what penalties will we face, if any?

@bobcobb 

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@fanfare

Hello - Asking for a clarification here for the year 2024 tax situation.

1. Do I need to report the over contribution as Misc Income or not?  If not, does Turbo Tax automatically add the excess contribution to the wages to be taxed?

2. If I leave the excess amount and do not request a withdrawal, what happens to the earnings on that excess amount? Is that also just taxed at the distribution after retirement or there is any other form of penalty associated?

1. Yes, you need to report the excess deferral in the year the excess deferral happened. If you follow the steps below in will be reported on line 1h of Form 1040. 

 

No, TurboTax doesn't automatically adds it to the wages, you must use the steps below.

 

Please follow the steps below to add you excess deferral to your wages:

 

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".

 

If you receive the distribution of the excess deferral and earnings by April 15th then please note for the Tax Year 2025 tax filing due April 15, 2026: 

• Form 1099-R with Code P in box 7 can be ignored if you reported the excess as described above in 2024. 
• However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2025.

 

2. If you do not withdraw excess deferral the earnings they will stay in the account. When you later withdraw the funds as regular distributions they are taxable income as every regular distribution from the 401k.

 

The "penalty" is that you pay taxes twice on the excess deferral amount if you do not take out the excess amount by April 15th. There is no other penalty.

 

@sking10