Accidentally Deposited into 401k and Withdrew Immediately - Options?

[scandee]

I accidentally deposited $6,000 into my 401k account as it is linked with other investment accounts. Once I realized this error I immediately made a rash decision and transferred it to the correct account. Now when filling taxes I have to report a $6,000 deposit and a $6000 withdraw to and from the 401k.  Is there any routes around this or do I just need to accept the penalty of my error. I am unsure of what options I have to avoid the penalty if any. Any help and insight is much appreciated!

[macuser_22]

401(k) plans are employer sponsored plans.   What type if 401(k) plan it this?  Is it some sort of self-employed plan?

Normally you cannot make any direct deposit or withdrawal from a 401(k) plan yourself without going through the plan trustee.

[scandee]

My apologies incorrect terminology. It is an IRA that I have set up and I have rolled previous employer 401k's into it.  However, this issue does not pertain to a rollover just an accidental oversight on my behalf of depositing funds to the wrong account.

[macuser_22]

I assume you mean a Traditional IRA and not a Roth IRA.

If you did not specifically ask the trustee if the IRA to do a "return of  contribution"  which would result in a 1099-R with a code 8 in box 7 and any earnings attributed to the contribution in box 2a which would be taxable, any you just took a normal distribution and it has a code 1 or 7 in box 7 then is will be a taxable distribution. 

@dmertz do you see any way to avoid the tax on this error.

[dmertz]

Since you received a 2019 Form 1099-R, presumably the deposit (contribution) and distribution both occurred in 2019.  Since it was an unintended contribution, if the contribution was made on or before April 15, 2019 I assume that you did not specify that it was to be a contribution for 2018.  (Let us know if that assumption is wrong).

Was this contribution an excess contribution either because you did not have sufficient compensation to support the contribution, you had already made a contribution for 2019 and when combined with this $6,000 contribution you exceeded the contribution limit, or because you were age 70½ or over in 2019?

What is the code in box 7 of the Form 1099-R?

Is the IRA/SEP/SIMPLE box marked?

[scandee]

Your assumption is 100% accurate this was in no way applied towards 2018 and it was after April.

This was and excess contribution made in error. My investment account and IRA accounts are under the same “parent account” I made the mistake of selecting the wrong account number when making the deposit.  I am under 70 years of age and I do not believe that I exceeded my overall contribution limit with this deposit. I just had intended for the funds to go to the investment account and so I made the transfer as soon as I realized the $6000 inadvertently went to the IRA Account. 

Box 7 is a #1 and IRA/SEP/SIMPLE IS Checked. 

[dmertz]

So if you made no other contribution for 2019 and you have sufficient compensation to support the contribution, a deposit of $6000 this is not an excess contribution.  The only penalty is the 10%, early-distribution penalty on the taxable part of the $6,000 distribution.  You'll need to report both the contribution and the distribution.  You could reduce the penalty by treating the $6,000 contribution as a nondeductible contribution (or perhaps you are required to treat it as nondeductible due to your combination of modified AGI, filing status and active participation in a workplace retirement plan) , but unless $6,000 represents a large amount compared to the amount remaining in your IRA, the benefit would be small and the downside would be that you will have basis in nondeductible traditional IRA contributions that will generally persist until you have distributed all funds from all of your traditional IRAs.  Of course if you already have some amount of basis in nondeductible traditional IRA contributions, there would be no real downside to carrying a little bit more basis other than the fact that you will see no immediate tax savings from making the nondeductible contribution although it will reduce the taxable amounts of future distributions.