Over contributing 401k in 2022

[vijayar]

Hi @DanaB27 

Thanks for your reply. I have a follow up question based on the Distribution Statement I just received from Fidelity.

Requested amount $3730.xx

Distr. amount (from Fidelity) $3715.xx

1. Per Fidelity- Since the investment lost value, they returned a smaller amount than I requested. (I understand this part)
2. Does this mean I still have an excess in my 2022 Contribution?? They said they did this as per IRS rules.
3.  So the main question I have now- What should I enter for the "Misc. Income" section in TurboTax?
   1. The original amount I requested ($3730.xx)  OR
   2. The actual amount distributed ($3715.xx) (Does this imply I still have an excess for 2022??)

Kindly advise. Thank you.

[DanaB27]

No, you don’t have an excess contribution, you removed the excess contribution with a loss. Fidelity followed the rules correctly.

You will enter the full amount of the excess contribution (the original amount of $3,730) on your 2022 tax return.

The loss will have to be reported on your 2023 tax return:

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 reportable income" and click "Start"
6. Answer "Yes" to "Any Other Taxable Income?"
7. Enter "Loss on Excess Deferral Distribution” and enter the loss as a negative number (-$15)

“Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Schedule 1 (Form 1040), line 8z, and identify it as Loss on Excess Deferral Distribution”. (Pub 525)

@vijayar

[vijayar]

Thanks a lot for clarification @DanaB27 Are these instructions applicable to the desktop version also? If so could you please share instructions for the same.

[MichaelG81]

Yes, please follow the instructions provided for software/desktop version, very similar to online and what DanaB was writing about. Here's DanaBs instructions for desktop not online.

1. Click Personal
2. Personal Income
3. I'll Choose what I work on
4. Less Common Income
5. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
6. Select "Other reportable income" and click "Start"
7. Answer "Yes" to "Any Other Taxable Income?"
8. Enter "Loss on Excess Deferral Distribution” and enter the loss as a negative number (-$15)

@vijayar 

[vijayar]

Thanks @MichaelG81 but I was asking how to report the ROE deferral income (not the gain/loss) associated with same. 

[DanaB27]

Please follow these steps to add the excess deferral to your wages in TurboTax Desktop on your 2022 tax return:

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down "Less common income" and click "Start" next to "Miscellaneous Income, 1099-A, 1099-C"
4. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
5. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
6. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
7. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
8. On the "Any Other Earned Income" screen enter "2022 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

@vijayar 

[vijayar]

Hello @DanaB27 

I have one further follow up question, I have just received a letter from Fidelity. I would like to understand the below highlighted section: could you please explain why they are referring to "0.00 of Roth" contributions and where the same should be reported? (I have already filed my return with the steps you have provided earlier)

 Please be advised that the full amount of the excess deferral, $0.00, which represents a return of Roth contributions, must be included in your taxable income for 2022"

Dear Sir or Madam:
It has been determined that you had made an excess deferral of $37xx.xx into the above-referenced retirement plan in 2022. Under Internal Revenue Service (IRS) regulations, this excess deferral must be returned to you along with the earnings on this amount.
Since the investment return on your account for 2022 was negative, the amount being returned to you is the excess deferral minus the loss attributable to the excess. The check recently sent to you in the amount of $3xxx.xx represents this corrective distribution less any applicable withholding, and is not eligible for rollover to an IRA or employer-sponsored retirement plan. In January of 2024, Fidelity will issue an IRS Tax Form (1099-R) reflecting this distribution.
Please be advised that the full amount of the excess deferral, $0.00, which represents a return of Roth contributions, must be included in your taxable income for 2022. If you have already filed your 2022 Federal and State (if applicable) income tax returns, it may be necessary for you to file an amended return. In addition, please note that in January of 2024 you will receive a 2023 IRS Tax Form (1099-R) reflecting the distribution of this excess deferral. This form, which will be filed with the IRS, will indicate that this distribution was taxable to you in 2022 (excluding any Roth excess contributions). The loss attributable to your excess deferral, $xx.xx, may be reported as a negative amount on the "Other Income" line of your 2023 Federal and State (if applicable) income tax returns. Given the complex nature of this corrective distribution, you may wish to discuss the tax implications with a qualified tax advisor.
Should you have any questions concerning this distribution, please contact your Plan Administrator.
Sincerely,
Fidelity Investments

[DanaB27]

To confirm, this wasn't an excess to a regular 401(k) but instead a Roth 401(k)? Contributions to a Roth 401(k) have been already taxed and therefore you would not have to add the excess deferral to your wages.

"If the distribution was for a 2022 excess deferral to a designated Roth account, your Form 2023 Form 1099-R should have codes B and P in box 7. Don’t add this amount to your wages on your 2022 return" (Pub 525).

If you had only a Roth 401(k) then would have to amend your 2022 return to remove the excess deferral after your return has been processed. I'm sorry for the miscommunication. 

@vijayar 

[vijayar]

Hi @DanaB27  thanks for the reply- this was regular pre-tax 401k so I believe what you said earlier still applies. However my question was re: the highlighted section “why  would they indicate “$0.00” for the Roth”? The rest of the letter agrees with whatever u have mentioned earlier. 

[DanaB27]

I assume that they just use a standard letter and in the sentence indicate how much of the excess deferral was a Roth 401(k) contribution ($0 in your case). 

@vijayar 

[par202003]

Hi,

My situation is a little different. I missed the deadline to inform my employer and I also missed the April 15th deadline of 2023.

When I filed by taxes on Apr 15th, Turbotax showed I over contributed by ~400 in 2022 because of 2 employers.

What options do I have now? My return just got accepted. 

Thanks,

P

[DanaB27]

Please be aware, since you didn't take out the excess amount by April 15th, you are taxed twice on the excess deferral left in the plan.  This happens once when you contribute it (with the steps below) and again when you receive it as a distribution. You can't include the excess amount in the cost of the contract even though you included it in your income.

You will have to wait until your return has been processed and then amend your tax return to add the excess deferral to your wages with these steps:

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 missed the deadline you can check if your plan allows keeping the excess in the plan until you are 59 1/2. Then you can avoid the 10% early withdrawal penalty. 

Please see How do I amend my federal tax return for this year?

@par202003

[namanrg]

Hi LindaS5247,

How would it work if the withdrawal excess was withdrawn from my Roth 401k before April. A small amount of earning is there which is shown as taxable do I just report that as additional income? 

Also do i need to update the W2 Section 12 with new numbers after the withdrawal?

[namanrg]

DanaB27 I had a withdrawal from 401k Roth to help resolve my overall 401k excess contribution.  Do I just report the earnings from the withdrawn amount? Also, do i need to update section 12 in my income from W2 with updated numbers after withdrawal?

[DaveF1006]

Yes, you will need to report the earnings of the withdrawal, but you can wait until next year when you will receive a 1099R. The earnings will be reflected in that form. You don't need to make a manual adjustment on your W2.