401K excess contribution - deadline to withdraw

Forum|Forum|5 years ago
April 22, 2021
2 replies
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I made an excess contribution to my 401K due to job change mid-year 2020. TurboTax is saying that I have until May 17th (tax filing date) to withdraw the excess funds from my account without incurring additional tax. However, ADP is saying that the deadline is April 15th and refuses to action the withdrawal. The IRS publication on this matter states April 15th, but we weren't sure if there was any latitude for interpretation since many similar issues seem to be tied not to the specific April 15th date, but to the tax filing date.

If we already missed the window for which we can do the reversal, then I guess we'll have to keep the excess contribution in the account and pay tax again in the year we receive the distribution as per normal with all the other funds that are in the 401K account?

macuser_22

Alumni - Champ

@shung wrote:

If we already missed the window for which we can do the reversal, then I guess we'll have to keep the excess contribution in the account and pay tax again in the year we receive the distribution as per normal with all the other funds that are in the 401K account?

Yes, April 15 was the last day the excess could be returned. You still must report it as an excess and pay the tax on the excess and will be taxed again when finally distributed. That is the penalty for missing the removal date. (The upside is because the security market has been strong, you actually might be money ahead with the excess still invested and earning income that might exceed the tax.)

Excess 401(k) deferrals should be reported in:
(There are several screens to click through to get to the right place)

Miscellionious Income ->
Other Income not reported on a W-2 ->
Other wages (yes) ->
House Hold employee (Continue) ->
Sick Pay (Continue) ->
Other earned income (yes) (Includes excess salary deferrals)->
Source of income (other) ->
Any other income - enter the amount of the excess deferral and an explanation.

This will add the returned excess to your 2020 wages on line 1 exactly the same way that the 1099-R would. The only information that is sent to the IRS is the line 1 amount.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

shungAuthor

Level 2

Thank you for the clarity of your response. I did follow the guidance to report the excess as income in my 2020 tax return.

I guess TurboTax should update their Help guidance to say April 15th (and not May 17th!) as the deadline for withdrawing the excess funds.

macuser_22

Alumni - Champ

@shung wrote:

Thank you for the clarity of your response. I did follow the guidance to report the excess as income in my 2020 tax return.

I guess TurboTax should update their Help guidance to say April 15th (and not May 17th!) as the deadline for withdrawing the excess funds.

Where does TurboTax say that about 401(k) excess? May 17 is the last day that excess *IRA* contributions can be returned.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

Balak

Level 2

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.”

Bakdawgs

Level 2

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.

vfarinella1

Level 2

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.

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!