Excess 401K contribution because of job changes in 2018?

[dmertz]

2018 TurboTax does do this check and inform you if you made an excess deferral, but if you skip around among various entry topics the check could be missed.

[Opus 17]

---

@urlreader wrote:

@Opus 17 if it triggered the overlimit, it should automatically plus the excess contribution to the 1040 line 1 for taxable income correct (although it did not in my case).

---

No one here can see your tax return data file or your completed return.  The program should detect the excess contribution.  We don't know why it didn't in your case. 

[urlreader]

I still have the data file and version 2019. So, if I delete one of the w2, then add it again, should it pop up the message?

[dmertz]

Since you changed jobs in 2018, the situation relates to your 2018 tax return (2018 TurboTax), not your 2019 tax return.

No need to delete anything, just open your 2018 individual tax return in 2018 TurboTax and click the Done with Income button at the bottom of the list of income items.

Your original post indicates that you are using TurboTax Business (for Corporations, Partnerships, Estates and Trusts) but  TurboTax Business doesn't have anything to do with filing your individual tax return.

[krvenkat]

Hi ,

Checking what did you do to fix this issue? Even I noticed this year in 2022 that I made excess 401k contribution for 2020 tax year of $600 amount. Wanted to check how to fix it ?

[Critter-3]

@krvenkat 

This is an error you cannot fix once the year has passed.   You only have until the filing deadline to correct the issue and get the excess refunded to you from the employer.  Now you had to pay taxes on the excess in the year you made the contribution AND you will pay taxes on it again when you make the distribution.  This is how the IRS penalizes you for this error. 

[krvenkat]

@Critter-3 

Thanks. I'm aware that I cannot take the excess amount back from 401k provider. However I could not understand this statement - "Now you had to pay taxes on the excess in the year you made the contribution AND you will pay taxes on it again when you make the distribution"

Could you please elaborate on what needs to be done ?

[Critter-3]

Nothing needs to be done ... in the year of the excess contribution the excess should have been added to your wages on line 1 of the form 1040 so you could pay taxes on the excess withheld from the box 1 of the W-2.  And then later, when you eventually take a distribution from the 401K you will pay taxes on the entire distribution ... you will get no credit for the taxes paid earlier on the excess contribution.   Thus you are paying taxes on the same money twice and there is no way to mitigate this issue. 

[krvenkat]

Thanks. But is there a way to file 1040-x amendment for 2020 tax year now and update the excess 401k and pay taxes for that difference ?

[AmyC]

You can always file an amended return to pay for the excess 401k. The first question is do you need to file an amended return? Here are the scenarios that I see:

• If you had an excess 401k deferral and worked for one company the whole year, they should have included the excess in your wages and noted that you have contributions that were taxed. Some companies will do that but it is a small percentage- about 10% in 2020. This will prevent being taxed on the income when it comes back out due to the recorded basis.
• If you had an excess 401k deferral from working at 2 or more jobs, neither company is aware of the excess and it is up to you to include the additional income on your 2020 return. You will need to file the 1040X. I would save the paperwork for the amended return and see what the rules are when you are ready for a distribution. You may be able to claim that as part of the basis.

@krvenkat 

[krvenkat]

@AmyC 

Its been 2 years now and I just realized this year. Should I leave the Excess $600 401k contributed in 2020 as-is or what are my options ? Is this something I should worry about now ?

[Opus 17]

---

@krvenkat wrote:

@AmyC 

Its been 2 years now and I just realized this year. Should I leave the Excess $600 401k contributed in 2020 as-is or what are my options ? Is this something I should worry about now ?

---

In other words, should you cheat on your taxes?  We can only tell you what the rules are.  We can't make you follow them.  

As a point of law, the IRS has 3 years to audit you in most cases, so for a tax return filed on time for 2020 (that is, May 17, 2021), the IRS has until May 17, 2024 to contact you about the deficiency.  If they do, the late fees and interest add about 1% per month of the under-stated tax. If you have underreported income of $600, that will result in a tax deficiency of about $132 (for most taxpayers) plus an extra 1% per month from May, 2021 until you actually pay.

As a matter of practicality, most taxpayer are never audited.  However, since the excess contributions were reported on your W-2s and the IRS could figure out the deficiency by adding up your W-2s and comparing it to your tax return, it's not really a matter of someone pulling your file from a pile of 50 million tax returns, it's a matter of whether the IRS computers are programmed to detect this type of mistake and generate an automated letter.

It's up to you. 

[krvenkat]

@AmyC 

Thanks for your smart advise. I will work out to fix this !