Excess 401K and IRA Contributions

[sasho]

Good morning everyone,

A couple of questions around ROTH IRA and Traditional 401K:

1- In 2022, I over-contributed to my traditional 401K. I sent a request to my brokerage firm to remove the contribution and send me a check back. My question is , as I file my taxes in 2023, is there anything that I need to do to inform IRS that I have remove the excess contributions or will that happen in 2024?

2- As I was doing my 2023 taxes, it turns out that my wife and I were over our MAGI to contribute to a roth IRA (Even though we maxed it out in 2022). I asked the brokerage firm to remove 2022 contributions (with a special form). Is there anything that I need to do on my 2022 taxes to inform IRS that I removed my ROth IRA contributions (with earnings) in 2022.

Thank you,

Alex Mansur

[DanaB27 · Accepted solution]

1. Please follow the steps below to enter your 401k excess into your 2022 tax return:

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

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

• 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.

2. Please enter during the IRA contribution interview on the penalty screen that you removed the excess contribution by the due date this will remove the 6% penalty.

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Continue until you get the penalty screen and enter the contribution amount removed.

You will get a 2023 Form 1099-R  in 2024 with codes P and J for the withdrawal of excess contributions and earnings. This 1099-R will have to be included on your 2022 tax return and you have two options:  

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

To create a Form 1099-R in your 2022 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2022?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2023 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 and removed the excess after December 29, 2022, then enter it next to "Corrective Distributions made on or after December 31, 2022")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.

[sasho]

@DanaB27 

Fantastic explanation. THANK you so much for walking me through this. To summarize:

1- For my 401K excess contributions, I added the excess into 2022's tax via the misc income and the excess got taxed. In 2024 we can ignore form 1099-R with code P since I reported it in 2022 (today).  but any earnings with code 8 in box 7 will be reported in 2023 and I do not have to amend 2022, correct?

2- I am trying to calculate the contributions + earnings (the earnings part is a bit challenging). If I cannot calculate it, in 2024, when I receive my 1099-R, I would have to amend my 2022 tax filing to enter the necessary information. I have never amended a tax return. Is it difficult?

[LindaS5247]

Regarding your first question, no you will not have to amend for 2022, because you are making the corrections now.

Regarding your second question, you could try to ask your financial institution to calculate your earnings for you. 

 It is not hard to amend your return.  Follow the prompts in TurboTax and they will walk you through the steps.

Click here for a TurboTax video on How to amend your tax return.

Click here for instructions on How to file an amended return.

Click here for information on amending your tax return in TurboTax.

[sasho]

Thank you @LindaS5247  - that makes sense and I will contact my financial institution 🙂

[sasho]

@DanaB27 

What if it was a loss?  would we enter the loss?

[LindaS5247]

Yes, you would enter the loss as well. It would be entered as "Other Income". identify it as "Loss on Excess Deferral Distribution."  

Other income is reported on line 8 of Schedule 1 of Form 1040 and then the total from line 10 of Schedule 1 is transferred to line 8 of Form 1040 itself. 

To enter as Other Income in TurboTax, here are the steps:

• Sign in to your account, select Pick up where you left off
• To the right upper corner, in the search box, type in "other reportable income" and Enter
• Select Jump to other reportable income
• Next screen, Other Wages Received, select No to continue
• Next screen, scroll down all the way to the bottom, under Other reportable income, select Start
• Next screen, Any Other Taxable Income? select Yes to continue
• Enter a description and the amount.

Or you can:

• Click Federal Taxes -> Wages & Income and scroll down to Less Common Income
• Go to the last selection, Miscellaneous Income and click Start
• Go to the last option, Other reportable income and click Start
• When it asks, "Any other reportable income?" say yes and then type in a description and the amount to report it on your tax return.

Click here for additional information on an excess 401(k) deferral.
 

[smdoung]

hi! how do I adjust if I am not going to get the excess back by the tax deadline? 

[smdoung]

@LindaS5247 

How would I handle an over contribution to my 401K if I am not able to get the excess back by the tax deadline? 

[DanaB27]

If you cannot get the excess deferral distributed by April 15th (note this isn't the tax return due date) then you are taxed twice on the excess deferral left in the plan.  This happens once when you contribute it (when you add it to your wages with the steps below) and again when you receive it as a distribution (From 1099-R).

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

@smdoung