Over Contributed Too Much to Solo 401k $1,800, need remove but account value $1,500 currently

[mrtk31]

Ok so I'm an idiot and estimated my employer profit share solo 401k contribution wrong and when I did my taxes it worked out that I can only contribute $100 to it, but I contributed $1,900 a few months ago.

Current account value is $1,500

I need to remove $1,800 and just have the $100 as contributed like my taxes say.

My broker has the removal of excess form but I just don't know what to do in this situation I created for myself.

I'm in a pickle and I don't like pickles :(

[DanaB27]

Yes, you will have to remove the excess deferral by April 15th to avoid double taxation on the amount. You will request to remove the excess contribution, it seems as if you have a loss at the moment and therefore you will not have any taxable earnings. The brokerage firm should be able to calculate the loss and calculate the correct distribution amount.

You also have to include the excess deferral of $1,800 in your income, please follow these steps to enter this in TurboTax:

Please follow the steps below:

1. Login to your TurboTax Account 
2. Click "Federal" from 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 "2021 Excess 401(k) Deferrals" for the description, enter the amount of $1,800 and click "Done".

Please note for the Tax Year 2022 tax filing due April 15, 2023: 

2022 Forms 1099-R will be issued reporting the excess.

• Form 1099-R with code P in box 7 can be ignored if you reported the excess as described above in 2021. 
• However, since you had a loss you should not get Form 1099-R with Code 8 in box 7  that reports earnings. Any earnings are reported in 2022.

 

[mrtk31]

thank you for the help.

I'm confused what you mean about including the excess deferral $1,800 in my taxes.

I did my taxes and only put down a solo 401k trad employer contribution of $100 I did not put down $1,900.

The reason my confusion in what I should do is because my taxes show I only contributed $100 to my solo trad 401k not $1,900

If I do it like you said I would have to add an additional $1,800 of income which means I would be adding that $1,800 twice, and I did not earn $1,800 twice I only earned it 1 time.

I don't think that's fair that I have to add more income that I didn't even earn.

[DianeW777 · Accepted solution]

Based on your information and since you did not deduct the $1,800 on your tax return for 2021, there is no income to report. And if you remove it before April 15th, you will not have any penalty.  There would be nothing to add back to you income in your scenario.

As indicated by our awesome Tax Expert @DanaB27, you will likely have no earnings since your account lost money so there is no interest (earnings on the contribution) to report. You must have the brokerage firm calculate the loss and calculate the correct distribution amount.

With a market fluctuation taking place today it's quite normal to see a drop in value in a retirement account. 

@mrtk31

[mrtk31]

 you guys are the best thanks so much I had td ameritrade handle it and now the correct amount is in there and I'm all good ty ty ty 

[az2324]

Hi @DianeW777 and @DanaB27 ,

I've seen your response to this post and I was wondering if I can ask a similar question for the situation I am in. I have already posted my situation in the community in another post, but I wanted to confirm with another person before I submit my taxes.

I have a W-2 job, but I also earn 1099 income. I have 401k plan with my employer for my W-2 job, and I have a separate solo 401K plan that I use for my 1099 income.

For my W-2 job, I contributed the maximum allowable to my 401k plan for 2023 ($22,500) as employee deferrals.

After starting my taxes for 2023 using the Turbotax Desktop, I realized I over-contributed to my solo 401k plan by $25, and earned $3 on that while in the plan. This was because I failed to subtract the 1/2 of SE tax when calculating the 20% of net SE earnings. I already filed with Fidelity the overcorrection this week which is in the process of being withdrawn.

Since I haven't filed my 2023 taxes, I just need help on how I should report the contribution and over-contribution on the Desktop Home & Business Turbotax 2023.

1) Under "Less Common Business Situations" and then "Self-Employed Retirement," do I report the amount I contributed to the solo 401K plan including the over-contribution (including the $25) or do I deduct the over-contribution from that amount in that section? 

2) In the same section where the contribution amount is placed, does my excess contribution to the solo 401K go under "Elective Deferrals" or "Employer Matching" since I maxed out my W-2 employee 401K plan? I am curious since the over-contribution could be for employee deferrals or employer contributions, and I am not sure if one is preferred over the other? 

3) How do I report an over-contribution to my solo 401K plan I use in the Turbotax Home & Business Desktop, since it came from self-employed income/plan and not my W-2 income/401k plan?

Do I need to report in my 2023 taxes if it is withdrawn before tax day (as I've done) and I keep the over-contribution income ($25) in my Schedule C? Then just wait until 2024 to report the $3 earnings? Or do I have to report in 2023 as extra income and then the earnings in 2024? 

I am just confused since this is coming from my self-employed 401k plan/income

Thank you so much in advance

[DianeW777]

Yes, you reduce your total contribution by the $25 excess and do not include that in your total deduction for 2023.  You should enter the amount as elective deferrals.  Since you removed the excess by April 15, there is no income to report .

Please note for the Tax Year 2024 tax filing due April 15, 2025: 

2024 Forms 1099-R will be issued reporting the excess.

• Form 1099-R with code P in box 7 can be ignored if you reported the excess as described in 2023 above.
• The interest/earnings will be income in 2024 ($3.00). 

@az2324 

[az2324]

Thank you so much for your response! Sorry, I just wanted to clarify. At the top of the post you mentioned there’s no need to report the $25 as overcontribution withdrawal income but at the bottom it says if you reported the overcontribution in 2023 as above. So do I need to report the $25 overcontribution withdrawal in my 2023 taxes anywhere or as you stated just remove the $25 from the retirement contributions on the business side (schedule 1) and just report the earnings in 2024? Sorry it’s just confusing with the two plans I have. 

Thanks!

[ThomasM125]

You would report the $25 withdrawal and associated $3 in income on your 2023 tax return. You would do this by entering a substitute Form 1099-R as follows:

1. Go to the personal income section of TurboTax 
2. Find the Retirement Plans and Social Security menu option
3. Start or Update IRA, 401(k), Pension Plan Withdrawals (1099-R)
4. Choose Add Another 1099-R
5. Choose I'll type it in myself
6. On the screen that says Tell Us Which 1099-R You Have choose I need to prepare a Substitute 1099-R
7. Enter the distribution amount in box 1 of the substitute 1099-R
8. Enter the earnings in box 2(a)
9. Enter code "P" in box 7 
10. When asked about the year on the form 1099-R, say it is for the year following the year you are working on

@az2324