Over contributed to pretax 401k (job switch). Now I've passed the ddl to take excessive out and first 401k has rollover to the current one, what should I do now?

[ludielovewi]

The over contributed amount is 699 which is smaller than the minimum(1000) of the plan allowed to early withdrawal. Because my plan does not allow me to correct last year's contribution anymore, I hope to get a full understanding on what are my options and and what are each tax implication for it. So far I think I have the following options 1. early withdrawal $1000 with 10% penalty. How much tax would I own? 2. leave the money in the account until I leave the company. Let's say 3 years later. Do I need to pay taxes each year? what about the gains on the $699? Do I need to do bookkeeping on the $699 investment? 3. Can I contribute $699 less this year to offset the over contribution? 4. Any other options I have?

[DanaB27 · Accepted solution]

If you do not take out the excess amount by April 15th, then you are taxed twice on the excess deferral left in the plan.  This happens once when you contribute it and again when you receive it as a distribution. You can't include the excess amount in the cost of the contract even though you included it in your income. 

If you miss the deadline there are no other options with excess deferrals and you can leave the funds in the account.

You do not pay a yearly penalty on excess deferrals the 6% penalty only applies to IRAs.

You must include the excess deferral in your wages in the year the excess deferral happened. 

Please follow 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".

[dmertz]

"Because my plan does not allow me to correct last year's contribution anymore, I hope to get a full understanding on what are my options and and what are each tax implication for it."

If you are referring to an excess elective deferral made for 2024, as @DanaB27  said, the deadline to obtain the corrective distribution is April 15, 2025.  Because this deadline has not yet passed, your current employer should cooperate with your request to make the return of excess contribution.

[ludielovewi]

Thank you @dmertz , it is for 2024. The 401k plan manager mentioned the deadline is 3/1 and I sent their email on 3/2 (unfortunately). Is there any other way to make corrective distribution without going through the plan manager?

[dmertz]

"Is there any other way to make corrective distribution without going through the plan manager?"

No.

Apparently this plan imposes its own deadline for requesting a return of the excess contribution.  They are permitted to do that pursuant to the terms set forth in the plan agreement.