Excess deferral to traditional 401k which were rolled into traditional IRA

[Shiba500]

Hi all, I have a situation which is a little unusual: I changed job mid-year 2019 and didn't realize that I already maxed out my 401k contribution at my previous plan. I continued to contribute ~$2K to my new 401k plan with some employer matching. I recently changed job again and rolled both plans into a traditional IRA at which point I realized that I've over-contributed.

I understand that if I haven't rolled over the fund, I can simply contact my plan admin to request a corrective distribution, but since the fund is in my IRA already, how can I request for such distribution and what are the steps?

Thank you very much for your help!

[Anonymous]

such excess including earnings thereon must be withdrawn by the due date of the return.  the best way to find out how to proceed is to contact the IRA custodian.  

[dmertz]

The excess contribution to the 401(k) and the gain or loss on that excess contribution while in the 401(k) represent an amount that was ineligible to be rolled over to the traditional IRA and therefore constitutes an excess contribution to the IRA.  You have three choices:

1. You must either contact the IRA custodian, convince them of the amount that is an excess contribution to the traditional IRA and obtain a return of contribution from the IRA with which they must include the gain or loss on that amount while in the traditional IRA.
2. You can leave the amount that was ineligible to be rolled over to the traditional IRA in the traditional IRA and treat it as a regular personal contribution to the traditional IRA for 2019, provided that you have not already contributed the maximum to a traditional IRA for 2019.  Given that you are an active participant in a workplace retirement plan for 2019 this traditional IRA contribution may or may not be deductible.
3. Ignore the fact that this represents an amount ineligible to be rolled over to the IRA, report the excess contribution to the 401(k) as miscellaneous income not already reported on your W-2 and leave it in the traditional IRA.  This will result in double taxation of the contribution because it will be taxable again when eventually distributed from the traditional IRA.  This is the simplest option and you would not report any regular contribution to the traditional IRA that I mention below.

Either way, because the excess contribution to the 401(k) will be excluded from your income in box 1 of the W-2 from the second employer you'll have to report on your 2019 tax return the amount of the excess contribution to the 401(k) as miscellaneous income not reported on your W-2 and any gain on that amount while in the 401(k) as other miscellaneous income.  You'll also need to enter the excess amount rolled over to the traditional IRA as a regular personal contribution to a traditional IRA and if you have that contribution returned from the traditional IRA you'll need to include an explanation for the return of contribution.  Any gain on the returned contribution will be subject to ordinary income tax and, if you are under age 59½ to a 10% early-distribution penalty.  If you don't obtain a return of contribution from the traditional IRA you'll still probably want to include an explanation statement with your tax return.

If you obtain a return of contribution from the traditional IRA, reporting will be much easier if this is done before the end of 2019 since you'll get a 2019 Form 1099-R reporting this distribution instead of a 2020 Form 1099-R a year later (which would still need to be reported on your 2019 tax return).

[dmertz]

I revised my answer above to add a third option which is to simply leave the money in the traditional IRA and just report the excess contribution to the 401(k) as miscellaneous income not already reported on your W-2.  The result will be eventual double taxation of the ~$2,000.  Although the amount rolled over to the traditional IRA would normally be considered to be an excess contribution to the traditional IRA if it had been an amount the employer had mistakenly contributed to your 401(k), I haven't ever heard of the IRS treating a rolled over excess elective deferral as an excess contribution to the traditional IRA when taxes are paid on the on the excess contribution.  The second option, which is somewhat similar since it is all handled on your tax return, avoids the double taxation but requires explanation to the IRS (which may or may not be understood by the IRS) since the Form 5498 that the IRA custodian will be providing will show the entire amount as a rollover contribution, not separate rollover contribution and regular contribution.