Overcontributed to 401K - Please suggest next steps

[sathish23]

Hello,

I switched jobs last year and it looks like I overcontributed around $600 to my 401K. I have not filed my taxes yet as I have filed for extension. Please let me know what I should do either on filing taxes or with regards to reaching out to my 401K account servicing or employer.

Thanks in advance. 

[macuser_22]

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@sathish23 wrote:

Hello,

I switched jobs last year and it looks like I overcontributed around $600 to my 401K. I have not filed my taxes yet as I have filed for extension. Please let me know what I should do either on filing taxes or with regards to reaching out to my 401K account servicing or employer.

Thanks in advance. 

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Last year is assume you mean 2020.     Unfortunately it is not too late to get a corrective distribution of the excess plus earnings form the 2nd employer as that has to be done prior to April 15, 2021 and the employer is not required to return it since they do not over-withhold themselves.

In this situation the money must remain in the account and you will pay tax on it when eventually taken out (after retirement), however since that money was not taxed on your 2020 W-2, you must add it back as 2020 taxable income.    That will result in double taxation on the money - the 2020 tax and again when finally withdrawn - that is the penalty for not timely removing the excess by April 15, 2021.

If you have not file 2020 tax yet then add the income as follows or if you have filed and it was accepted and you received any refund then amend 2020 and add the income which will result in additional tax to be paid.

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 2020 1040 wages on line 1.

For information on this see IRS Pub 525 page 10-11  (excess not returned).
https://www.irs.gov/pub/irs-pdf/p525.pdf

[sathish23]

Thanks for the response. After I posted, I also saw a couple of other posts and I wanted to confirm something before I proceed.

1. I can call the 401 Account Manager and ask for the $600 excess deferral to be returned to be, show that as income as suggested and add additional 10% of $600 as income due to early withdrawal or

2. I can ask the excess $600 to be used for this years (2021) 401K, show $600 as income as suggested in 2020 taxes.

Are either of these correct? I also keep seeing about some 6% penalty so not sure where and on which option it would apply.

Thanks

[macuser_22]

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@sathish23 wrote:

Thanks for the response. After I posted, I also saw a couple of other posts and I wanted to confirm something before I proceed.

1. I can call the 401 Account Manager and ask for the $600 excess deferral to be returned to be, show that as income as suggested and add additional 10% of $600 as income due to early withdrawal or

2. I can ask the excess $600 to be used for this years (2021) 401K, show $600 as income as suggested in 2020 taxes.

Are either of these correct? I also keep seeing about some 6% penalty so not sure where and on which option it would apply.

Thanks

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#1) As I said in my answer - the excess had to be returned *before* April 15, 2021 or it cannot be returned at all.

#2) . No. it must be reported as 2020 income as I said above.

#3) The 6% penalty applies to IRA's, not 401(k) plans.