Individual 401k excess contribution

[copconphunhan]

I just learned that I over-contributed to my individual/solo 401k because I added to the plan more than my net earnings from self-employment. I am trying to figure out what my best options are:

1. Withdraw the excess contribution and any gain (the gaining is not significant at all). My understanding is I will receive a 1099-R and the excess contribution and gain will be taxable in the year that it is withdrawn. Is it correct? It does not make sense to me though because since the excess contribution does not come from my new self-employment income, I already paid tax on it. Why do I have to pay tax again?

2. If I withdraw the excess, how do I report on 2021 tax return? Do I still enter the amount that I over contributed or the amount after the excess is withdrawn?

3. Is there any other way to avoid paying tax now, such as transferring the excess to a different retirement plan? 

[AliciaP1 · Accepted solution]

The correct process is to contact your plan administrator and request a "Corrective Distribution".  This should be done prior to the filing deadline for 2021 in order to avoid additional penalties.  This will be reported on a 1099-R with the distribution being reported in 2021 and any earnings reported in 2022.

If you have a traditional 401k set up the deferrals and contributions are pre-tax dollars, so when you receive the distribution it is taxable.

If your 401k is set up as a Roth, the deferrals and contributions are after-tax and therefore the distribution is not taxed.

See 401k corrections for more information on correcting your excess contributions.