Overcontribution to 2022 roth 401k w/ return of excess in 2023

[VictorDJ]

I switched jobs in January 2022. Due to the one paycheck I had from my old employer in 2022 I overcontributed to my 401k.

• I contributed 1718 to employer A (roth 401k) in January 2022
• Throughout 2022 I contributed 20500 through Employer B (mix of roth 401k and pretax 401k)
• In February I requested a return of excess from everything I had contributed to employer A, and received $1407 (there were losses).
• I received a letter from the Fidelity (who managed both 401ks) advising that the full amount of the deferral (1718) must be included in my 2022 taxes and that I’ll receive a 1099R in January 2024.

I am confused about this since - being a roth 401k - it would already have been included in my employer’s w2 and taxed, but maybe this simply is advising me not to deduct the loss from the 2022 taxes.

Do I need to report anything in my 2022 taxes besides what would already be in my w2? If not, wouldn’t it look (to the IRS) as if I did the excess contribution and never removed it without penalty?

[DanaB27 · Accepted solution]

No, you don’t need to add the excess contribution to the Roth 401(k) since these are after-tax contributions. 

Excess contributions to 401(k) won’t trigger a penalty like excess contributions to IRAs. But if the excess isn’t removed 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.

You will receive only one 2023 Form 1099-R (since you had a loss):

• The return of the excess deferral to the Roth 401(k) will be on Form 1099-R with codes B and P in box 7. Don’t add this amount to your wages on your 2022 return and it can be ignored.

“Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Schedule 1 (Form 1040), line 8z, and identify it as Loss on Excess Deferral Distribution.” Please see Pub 525 for additional information.

To report the loss on an excess deferral on your 2023 tax return:

1. Login to your TurboTax Account 
2. Click "Federal" from 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 reportable income" and click "Start"
6. Answer "Yes" to "Any Other Taxable Income?"
7. Enter "Loss on Excess Deferral Distribution” and enter the loss as a negative number

[VictorDJ]

Thank you!