Excess 401k contribution between two employers

[jss12001]

Thank you so much! Regarding your comment: 

Since you are penalized by paying taxes twice, you can decided if you want to remove the excess now or at a later time. 

Do you mean later in the year or potentially even after 2022? If after 2022, can I decide at any point in the future? 

[DanaB27]

Yes, you can decide to take it at any point in the future. Please see Excess deferrals for additional information.

@jss12001

[lnoser]

What do you mean when you say "You cannot include the excess amount in the cost of the contract even though you included it in your income"?

[kiz]

i’m in the same boat. dealing w excess after the april 15 deadline.  what’s the best course of action? do i need to withdraw the excess? can i / should i keep it in the account? is there anything special that needs to be done w filing my taxes for 2021? or can i file as per usual? (i filed an extension to sort this out)  thanks so much in advance. 

[macuser_22]

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@kiz wrote:

i’m in the same boat. dealing w excess after the april 15 deadline.  what’s the best course of action? do i need to withdraw the excess? can i / should i keep it in the account? is there anything special that needs to be done w filing my taxes for 2021? or can i file as per usual? (i filed an extension to sort this out)  thanks so much in advance. 

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If not removed by April 15, then it should not be removed at all since after that date it becomes taxable income that must be reported on line 1 of the 1040 form as wages since it was deducted from wages when the employer withheld if from your pay. It will just stay in the account until retirment when it will be taxed again. This double tax is the penalty for not meeting the Apr. 15 date.

Excess 401(k) deferrals should be reported in:
(There are several screens to click through to get to the right place)

Miscellionious Income ->
Other Income not reported on a W-2 ->
Other wages (yes) ->
House Hold employee (Continue) ->
Sick Pay (Continue) ->
Other earned income (yes) (Includes excess salary deferrals)->
Source of income (other) ->
Any other income - enter the amount of the excess deferral and an explanation.

This will add the returned excess to your 2021 wages on line 1.

For information see IRS Pub 525 page 10
https://www.irs.gov/pub/irs-pdf/p525.pdf

[rohitstm4]

Hello,

I over-contributed to my after-tax 401k that had led to my total 401k contribution (incl. pre-tax, employer match, and after-tax) exceeding the IRS limit of $61,000. Could you advise what I should do? My pre-tax 401k is below the $20,500 limit though.

Thanks!

[confused20221]

Thanks for the thorough advice.

If I plan to pay the tax on excess contribution in 2022 and leave the excess in there until say 2055. Will I pay the tax 2nd time only on the excess amount I put in or also on the earnings on this excess amount from 2022 through 2055? Right now the excess contribution is a couple of hundred dollars. But, if I have to pay taxes on the actual amount + earnings then not sure if the earnings will be a lot more after 33 years!

Any insight into this?

Thanks,

[dmertz]

Of course you'll pay taxes on the earnings.  Earnings in a traditional 401(k) account are always includible in income when distributed.  You'll pays taxes on the earnings on an excess deferral the same as you would if the earnings were attributable to contributions that were not excess contributions.  The only reason that you pay taxes twice on the excess deferral itself is that you pay taxes on the excess deferral when contributed and that excess deferral is not permitted to be treated as an after-tax contribution.  The fact that you made an excess deferral that was never corrected has no bearing on the way distributions from the traditional 401(k) account are taxed in the future.

[confused20221]

hmm thanks dmertz!

so in essence I'm only paying double tax on the couple of hundred dollars now and at retirement. And I'm paying taxes only once on the earnings of this excess deferral at retirement. So, it makes more sense to leave this amount alone. 

1. Right now: Excess $500 into 401K
-Pay tax now in 2022 [extended tax filing deadline of October 17th for tax year 2021] on $500 [1st time]

2. At retirement: Total amount = $500 + $2000 [approximate earnings in 20 years just on that $500]

- pay taxes on $500 again [2nd time]

-pay taxes on the $2000 which I'd have to pay only once either way irrespective of it being earned on the excess.

Am I assuming correctly?

Thanks in advance.

[dmertz]

Correct.

[Jaguar]

Just to follow-up on this question about over-contributing to 401ks....

What if you over-contributed to a ROTH 401k?  Since these funds were already taxed, do I need to do anything to my tax return?

Thanks in advance!

[dmertz]

@Jaguar , if you had the Roth 401(k) excess contribution for 2021 returned in 2022 by April 15, there is nothing to report of it on your 2021 tax return but you'll report any attributable gains on your 2022 tax return by entering the 2022 Form 1099-R that reports this corrective distribution.

If you did not have the Roth 401(k) excess contribution distributed timely, the excess contribution and attributable gains are the first amounts distributed from the Roth 401(k) and are taxable regardless of when they are distributed, resulting in double taxation (because the excess contribution was made with after-tax funds).

[davoti2]

I am reading your discussion thread, I am in the same boat and just realized it today that I over contributed 401k due to job changes. 

A quick question, when they return your excessive e401k contribution, do they also return the employer matching back to the employer OR they just return your contribution part?

Thanks

Dave

[AmyC]

Your excess contribution plus any interest earned should be returned to you. Be careful to not confuse your pre-tax deduction with your total deduction allowed. 

For 2022, the employer plus employee contributions to a 401k can NOT exceed $61,000. See IRS retirement plans for full details.

@davoti2

[ThanksForTheHelp]

Hi @MinhT1,

The instructions provided within the TurboTax application differ from yours. Within the application, TurboTax says:

Depending on the rules of your plan, and whether the plan administrator is notified sufficiently ahead of the tax return due date, you may be able to withdraw the funds to avoid paying additional taxes on the excess deferral. If you are able to withdraw the funds, here is how to report that:

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.

These instructions make sense to me, but I can't figure out how to "Indicate that this is a 2023 Form 1099-R." If you simply use Code P, it will assume that this is a 2022 Form 1099-R and the income is for 2021 (which is wrong). Any ideas?