@OwenL wrote:
Thanks for the reply. If the excess contribution is caused by me having multiple W2, and accidentally contributed too much, then is it safe to say that as long as I am willing to pay double-tax (once this year as other income, and once when withdraw + 10% early withdraw penalty), I am ok to leave the excess contributed amount in my 401k?
I'm not sure why you would pay a penalty.
If you remove the excess, it is added back to your taxable income. You also have to withdraw the earnings attributable to the excess contribution, and pay tax on the earnings, but there is no 10% penalty.
If you leave the excess in the account, it must still be added back to your taxable income. Then you pay income tax again when you withdraw it. You would not pay a 10% penalty unless you took an early withdrawal (before age 59-1/2, unless you separated from the company at age 55 or older).
Since you have to pay tax on the excess contribution no matter what, it does not make too much sense to pay tax on it twice, unless you think the investment options in the 401k are so good they outweigh anything else you might do with the money. For example, if you withdrew the excess and invested in a regular broker account, then whenever you withdraw, you would only pay tax on the gains instead of the basis plus the gains, and there would be no time limit on the withdrawal. Or, you could withdraw the excess and make either a Roth IRA contribution (if eligible) or a non-deductible contribution to a traditional IRA. Either of those strategies would allow you to pay less tax whenever you eventually withdraw the money.
But, you are correct that if you leave the excess in the 401k and add it back to your taxable income this year, there are no additional penalties or consequences other than paying tax again when you retire.
