401K excess contribution - deadline to withdraw

[macuser_22]

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@Balak wrote:

I’m in the same situation. My brokerage refused to process any excess since it’s past April 15. I have over $2200 in excess. Researching the potential tax consequence, it appears there would be a double taxation on the excess. Various articles and resources also talk about a 6% penalty per year being assessed for each year the excess remains in the account. Can someone please clarify this?

Quoting one of the articles from a CPA’s website below-

“The penalty for excess contributions is 6%. If you remove the excess amount prior to the end of the tax year, you will not be assessed a penalty. In other words, there is good news in that you might have a chance at avoiding this 401(k) penalty if you get the excess contribution out of your account before the tax deadline for the year it was contributed.”

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It is not clear what type of account you are talking about. 

The subject of this thread is an employer 401(k) plan, not a brokerage account.   A 401(k) never has a 6% penalty.  For a 401(K) the excess is reported on the 1040 line 1 for the year of the excess as I indicated in a previous post.    After April 15 of the following year it stays in the account if not removed before that date.   When you retire that amount will be taxed again as ordinary income - that is the penalty for not removing before April 15.

[Balak]

Sorry for the confusion. I’m talking about excess contribution on the 401k. By brokerage I meant Fidelity. There are plenty of online articles that mention 6% penalty if the excess is not removed before April 15. TurboTax pop up also mentioned this 6% penalty if the excess is not removed before the tax day. It is not clear if this 6% penalty would only be one time OR each year until the excess stays in the account? 

[macuser_22]

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@Balak wrote:

Sorry for the confusion. I’m talking about excess contribution on the 401k. By brokerage I meant Fidelity. There are plenty of online articles that mention 6% penalty if the excess is not removed before April 15. TurboTax pop up also mentioned this 6% penalty if the excess is not removed before the tax day. It is not clear if this 6% penalty would only be one time OR each year until the excess stays in the account? 

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The 6% penalty applies to IRA's, not employer plans.     Your 401(k) contributions are shown in box 12 on your W-2 and are NOT IRA contributions.     Are you confusing them?

[Balak]

Not confused. I’m talking about 401k. Here is an article from a Tax attorney talking about it—Skip to the section in the middle “Avoid the Tax on Excess 401(k) Contributions”

https://www.castroandco.com/blog/2020/february/401-k-contribution-limits-rules-and-penalties/

[macuser_22]

There are many articles that confuse IRA rules with 401(k) rules.   Many articles will also tell you that you have until the due date of the tax return to remove the excess, which is also wrong (the April 15 date is set by law as the deadline and just happens to coincide with the normal April 15 filing date, but if the filing date is changed the April 15 date for excess removal remains the same).  Those articles are incorrect.   Use official IRS publications for accurate information.

Both of these are stated in IRS Pub 525 and there is no 6% penalty.

For information see IRS Pub 525 page 10  "Excess not distributed" and "Excess distributed to you.".
https://www.irs.gov/pub/irs-pdf/p525.pdf

[amir75]

Macuser_22, Thank yo so much for all the info. Very helpful.

[Balak]

Thanks so much. Any recommendations on how to enter the excess on TurboTax? There are discussions that there are 2 ways to enter- 

1. Create a form 1099-R and enter excess in box 1, 2a and use code P for box 7

2. Miscellaneous Income >> Source of income (other) 

Any preferred way for folks who will not be able to withdraw the excess from their 401k’s?

[macuser_22]

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@Balak wrote:

Thanks so much. Any recommendations on how to enter the excess on TurboTax? There are discussions that there are 2 ways to enter- 

1. Create a form 1099-R and enter excess in box 1, 2a and use code P for box 7

2. Miscellaneous Income >> Source of income (other) 

Any preferred way for folks who will not be able to withdraw the excess from their 401k’s?

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#2  since you will not receive a 1099-R.

[Bakdawgs]

My wife was caught with a change of jobs and slightly over contributed to her 401k(s).  And turbo tax does have the mistaken information I was going on to withdraw the excess.  I was told 4/15 by the 401k administrator as well but had been relying on Turbo Taxes' information.  Its a hyper link that you can click on to pop up more information when it goes to check your retirement contributions and contains steps to take to make the correction before 5/17.  I thought we had plenty of time, at least until the new tax deadline as well because of this information.  To my disappointment the 401k administrator is correct with 4/15.  This does make me wonder what else Turbo Tax may have incorrect in their software??  I've use them for 30+ years too.  I was hoping to reach them directly but can't find a direct contact method.

[macuser_22]

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@Bakdawgs wrote:

My wife was caught with a change of jobs and slightly over contributed to her 401k(s).  And turbo tax does have the mistaken information I was going on to withdraw the excess.  I was told 4/15 by the 401k administrator as well but had been relying on Turbo Taxes' information.  Its a hyper link that you can click on to pop up more information when it goes to check your retirement contributions and contains steps to take to make the correction before 5/17.  I thought we had plenty of time, at least until the new tax deadline as well because of this information.  To my disappointment the 401k administrator is correct with 4/15.  This does make me wonder what else Turbo Tax may have incorrect in their software??  I've use them for 30+ years too.  I was hoping to reach them directly but can't find a direct contact method.

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Where do you see that in TurboTax?

Excess IRA contributions can be returned up to the due date (or extended due date).   401(k) is set by law to be 4/15.

[Bakdawgs]

It's on a screen after you've entered any 1099Rs for rollovers etc.  TT runs a retirement check and discovers you have excess 401k contributions and shows the dollar amounts and excess difference over the limit.  There are two hyperlinks below this information: one for and IRS form publication and one for what to do to correct.  If you click the second one, a help window appears with the wording a user in this thread above supplied stating that the correction can be withdrawn before 5/17.  I just noticed if you click on the example link on that pop up it is stated correctly in the examples  but not so on the main information pop up with the direction on how to correct it and report it.

[macuser_22]

Thanks.   Whoever wrote that probably assumed (wrongly) that the 4/15 date was the same at the tax return  due date (it usually is but that is just a coincidence).    The due date can be changed, as it was this year, but the 4/15 date for excess deferral removal is set by law and is not related to the tax return due date.

[Bakdawgs]

Yes it was definitely a TT error and one on myself for trusting what TT stated.  It just undermines confidence in the accuracy of TT sadly.

[vfarinella1]

Hi, so I am in a pickle at the moment. It is 4/14 and I am doing my taxes last minute online (turbotax, etc.) and I just realized that I overcontributed to my 401k by $1,465. I switched employers and miscalculated apparently. I could provide Fidelity with my W-2's to request a refund of the excess contribution but they said it would take 10-14 days to process, and filing for a tax deadline extension doesn't seem to apply to 401k overcontribution (from the research that I've done)....So it seems that I am SOL pretty much and won't be able to correct this properly by the deadline tomorrow, 4/15. 

So, my question is essentially, what do I do now?

Do I just ignore it pretty much and just pay double taxes on that amount when I withdraw it at retirement? Should I make any adjustments to my taxes before I file them this year like adjusting my W-2 income or adding a 1099-R form even though I haven't received the overcontributed amount back? Should I still request that overcontributed amount to be withdrawn from Fidelity ASAP because there is an annual fee for every year it's in there (read mixed messages on this online)? Do I contribute $1,500 less than the limit to my 401k this year to offset the overbalance from this year (read this somewhere online too)? 

There's so much conflicting and confusing info online, any help simplifying this on what I should do would be  immensely helpful!