401 K Excess Contribution -- Repercussions for not removing excess

[kevin_ny_2003]

I made some $117 excess in 401k contribution between the 2 401K plans I had in 2023. I know I can request removal of excess using a form . 

My question is : If I am ok to pay the penalty while filing taxes , will I be penalized only 1 year or will the penalty be levied till I finally take this excess $117 out ?

How much is the penalty approx?

Thanks

Kevin

[dmertz]

There is no penalty other than that the $117 must be reported as other earned income on Form 1040 line 1h, making it taxable on your 2023 tax return, and it will be taxed again when the funds are eventually distributed as a regular distribution sometime in the future.  That means that the "penalty" is $117 times the sum of your federal and state marginal tax rates.

[kevin_ny_2003]

 Thanks drertz: That means that the "penalty" is $117 times the sum of your federal and state marginal tax rates"

In case of a regular withdrawl after retirement age, if I am in 32% federal tax bracket

will that be 117*.32 = $37.44 and that will be only 1 time during that particular withdrawal?

Is my understanding correct?

What happens in case if I decide to take an early distribution due to hardship? Will IRS consider this $117 amount as a "first out" item from the total existing 401K balance ?

Thanks

Kevin

[dmertz]

Technically the $117 excess would come out first, but that doesn't really matter since it will be taxed the same way as additional amounts distributed.  It would be different if the excess was a contribution to a designated Roth account in the 401(k) where the $117 and any earnings attributable the $117 would be the first amounts out and would be taxable.

[kevin_ny_2003]

Thanks Dmertz. Can you please confirm this question as well?

In case of a regular withdrawl after retirement age, if I am in 32% federal tax bracket

will that be 117*.32 = $37.44 and that will be only 1 time during that particular withdrawal?

Thanks

[dmertz]

It's possible that your marginal tax rate is a bit higher than your tax-bracket rate, although perhaps unlikely if you are in the 32% tax bracket.  For example, it's possible that the additional $117 could make an additional $117 of investment income subject to Net Investment Income Tax of 3.8% (although it's possible that all of your investment income is already subject to that tax at an income level that puts you in the 32% tax bracket).  You don't know your marginal tax rate for certain until you add the income as see hos it actually affects your tax liability.  Marginal tax rate is:

(change in tax liability) / (change in  taxable income)