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Solved

401k Excess Contribution Late Withdrawal

Forum|Forum|3 years ago
February 15, 2023
2 replies
0 views

Due to having multiple employers in 2022, I exceeded my 401k contribution limit. I requested a refund of the excess deferrals, but because the plan provider is backlogged on requests they may not process my refund in time for 2022 tax filing.

Per these threads (401k overcontribution and What if I have a 401(k) excess deferral?) I understand the process assuming the refund is issued on time, but what about if the refund ISN'T issued on time? Is it still the same process of adjusting the box 12 amount to meet the contribution limit and adding the excess under Miscellaneous income? Is the only difference that for 2023 tax filing, I add the excess again as well as any earnings (presumably based on the 1099-R form issued for the refund) to be taxed a second time as a penalty for the late withdrawal?

Best answer by DanaB27

So to summarize, if the excess deferral is issued to me after the deadline of April 15, 2023 but before April 15th, 2024:

1) For my 2022 filing, I add the excess deferral amount as Miscellaneous Income following the instructions that DanaB27 gave, but I DO NOT adjust the amount in box 12 code D as I did not make the corrective distribution before the deadline.

2) The excess deferral and earnings made on it will be reported once more in my 2023 filing as a 1099-R form as codes P and 8 respectively, and at that time I may also pay an additional 10% tax penalty for the early withdrawal.

Sorry for all of the questions, this is my first time encountering this situation and I just want to make sure I have all of the details straight. Thank you very much for your help!

1) Yes, you will add the excess deferral with the steps mentioned above.

2) If you receive the distribution after April 15th, 2023 then it will be a regular early distribution and you will have to enter the received Form 1099-R on your 2023 tax return. As Tax Expert DianeW777 mentioned this distribution will be subject to the 10 % early withdrawal penalty.

If you a certain that they cannot remove the excess before April 15th, 2023, you might want to consider leaving the excess in the account until you are 59 1/2 to avoid paying the 10% early withdrawal penalty.

@ka2626_b

DanaB27

Level 15

First, you will have to add the excess deferral to your wages on your 2022 return no matter if you get it before April 15th or after. Please, review the steps below (you don't need to change your W-2 unless you receive a corrected one):

Login to your TurboTax Account
Click "Federal" from the left side of your screen
Scroll down to "Less Common Income" and click "Show More"
Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
On the "Any Other Earned Income" screen enter "2022 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

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 (with the steps above) and again when you receive it as a distribution (enter Form 1099-R on your 2023 return). You can't include the excess amount in the cost of the contract even though you included it in your income.

If you receive the distribution of the excess deferral and earnings before April 15th, 2023, then please note for the Tax Year 2023 tax filing due April 15, 2024:

2023 Forms 1099-R will be issued reporting the excess.

Form 1099-R with code P in box 7 can be ignored if you reported the excess as described above in 2022.
However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2023.

Please see Pub 525 for additional information.

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kabboston

Level 2

@DanaB27 thank you for all the detail you provided, BUT sorry a question. I am in the situation as the poster, changed jobs and over contributed.

I have already filed with my administrator for a refund of the excess amount, and they will be withholding taxes.

I understand your instructions, but I think this conflicts with what the Turbo tax told me when it told me I had an excess deferral. It said to report it as a 1099-R (if I was going to receive before 4/15) and in box 7 select P to indicate this is a 2023 Form 1099R. I came here because P in box 7 was talking about 2021, not 2022 and I was confused. Below is what Turbo tax had under what steps do I need to take:

1. Report the excess deferral on your 2022 return in the Income section for Retirement Plans and Social Security whether or not you received a Form 1099-R before you file your return. Enter as much information as you can. Report the excess deferral amount in boxes 1 and 2a, and use code P in box 7. Indicate that this is a 2023 Form 1099-R.

2. In 2023, you will probably receive two Forms 1099-R. One reports the excess deferral amount. The other reports the earnings on the excess deferral. Enter both of these forms in your 2023 return, and we'll only add the earnings to your 2023 income.

I think I am trusting you more than them 🙂 But any guidance would be appreciated.

Thanks

Kimberly

@DianeW777

Cynthiad66

Level 14

I am in similar situation but I realized that I have excess 401K on 4/15 so I won't get it back before deadline. My amount is small - ~850. I am including that amount in my miscellaneous for 2022 so nothing to amend there. What would be a suggestion now. Should I ask to return it now which means I will pay for that amount again tax in 2023 + 10% penalty or should I wait for my retirement (>15 years remaining) and then withdraw. If I withdraw after retirement, from what I read in other replies, I will have to pay tax on this 850 in addition to anything I will pay on the amount I earn on top of this. I just won't pay 10% penalty. Any suggestions on what is better to do?

Per our expert DanaB27, you will have to add the excess deferral for 2022 to your wages with these steps:

Login to your TurboTax Account
Click "Wages & Income" (under Federal) on the left side of your screen
Scroll down to "Less Common Income" and click "Show More"
Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
On the "Any Other Earned Income" screen enter "2022 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

Please be aware, 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 with the steps above 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.

Please see Pub 525 for additional information.

Excess contributions must be included as income for the year in which the contributions were made. If the excess contributions haven't already been claimed in that year, the return will need to be amended to include the excess distribution as income.

TurboTax will calculate your MAGI and determine whether you've made an excess contribution. If this happens, you'll be subject to a 6% tax penalty on the excess amount for every year that it stays in the account.

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ka2626_bAuthor

Level 2

@DanaB27 @DianeW777

Hello, thank you again for your help previously! From the earlier replies I understand the instructions assuming the refund is not issued on time, but I wanted to clarify one detail assuming that the excess is refunded on time, as I've been getting conflicting answers:

I previously referenced a discussion about amending W2 forms that seemed to indicate that the W2 box 12 amount should be reduced if the excess deferral was returned on time. However, this thread seems to indicate that no changes should be made to the box 12 amount and that the only correction for the W2 should be the addition of the excess deferrals as miscellaneous income. Which of these statements is correct? To be clear, I will not be receiving an updated W2 statement as my retirement account is being managed by a different company from my actual employer.

DanaB27

Level 15

You don’t need to change your W-2 box 12 entry, only enter it as reported on your Form W-2. You can ignore the warning about the excess deferral since you corrected it by adding it as other earned income with the steps above. The warning won’t cause a penalty (this only applies to excess IRA contributions). Therefore, you can ignore it.

@ka2626_b

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