Roth 401k Excess Contribution

[macuser_22]

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@ThomasS2020 wrote:

Hi - I had a follow-up question to this based on one of the very helpful points you noted.  I find myself in the same situation - I over-contributed to Roth 401k accounts for TY2019.  The excess contribution amount was returned to me in March 2020, in advance of the April 15 (assuming no coronavirus) deadline.  I understand that that next year I will receive a 1099R, however I am unsure of what, if anything, I need to do to complete my TY2019 return.  You mentioned in your message that all that is necessary now is to indicate that the excess contribution has been returned prior to April 15th.  Would you mind explaining how to do this?  

Thanks!

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If this was a 401(k) Roth then that is after-tax money  which was never deducted so there is nothing to report for the return.   However, it that excess generated any earnings while in the account then that is taxable income for the year returned - 2020.   You will get a 1099-R next year that reports that on your 2020 tax return.

[ThomasS2020]

Hi - thank you for your response.  That all makes sense to me - my only remaining concern is how does the IRS know that I did not actually over-contribute, since all they will see are the number(s) in the W2s, which add up to more than $19,000?  Will this not get flagged?

[macuser_22]

No.   The 401(k) plan trustee reports that to the IRS with the 1099-R.

IRS Pub 525 page 10 says NOT to include the excess. for a Designated Roth.

https://www.irs.gov/pub/irs-pdf/p525.pdf

[RussWill]

I made an excess contribution to a ROTH 401k in 2019.  It was discovered late and the plan sponsor could not send me a corrective distribution (return of my excess contribution) or any earnings on the excess before the tax filing deadline of April 15, 2020.  In June 2020, I received two 1099-Rs...one with a code of 7 in Box 7 for the 2019 excess contribution ($2666.66) and one with a code of 8 in Box 7 for the earnings ($1.74).  I'm working on my 2020 taxes now and understand from this thread that the earnings of $1.74 need to be reported on my 2020 tax return.   What do I do with the other 1099-R?  Since this is a ROTH 401k, do I need to report/file anything for the 1099-R showing the return of my excess contribution with code P in Box 7 and with $2666.66 in Box 1 and Box 2a?  It doesn't seem right to ignore the 1099-R with the code P, but at the same time, I don't see the need to report this distribution anywhere since this is a Roth 401k.  Are there different rules since I couldn't get the excess contribution returned before the filing deadline of April 15th? 

Any advice is much appreciated!

[macuser_22]

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@RussWill wrote:

I made an excess contribution to a ROTH 401k in 2019.  It was discovered late and the plan sponsor could not send me a corrective distribution (return of my excess contribution) or any earnings on the excess before the tax filing deadline of April 15, 2020.  In June 2020, I received two 1099-Rs...one with a code of 7 in Box 7 for the 2019 excess contribution ($2666.66) and one with a code of 8 in Box 7 for the earnings ($1.74).  I'm working on my 2020 taxes now and understand from this thread that the earnings of $1.74 need to be reported on my 2020 tax return.   What do I do with the other 1099-R?  Since this is a ROTH 401k, do I need to report/file anything for the 1099-R showing the return of my excess contribution with code P in Box 7 and with $2666.66 in Box 1 and Box 2a?  It doesn't seem right to ignore the 1099-R with the code P, but at the same time, I don't see the need to report this distribution anywhere since this is a Roth 401k.  Are there different rules since I couldn't get the excess contribution returned before the filing deadline of April 15th? 

Any advice is much appreciated!

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First you said a code 7 in box 7 and then a code P.

A code P for a designated Roth should have the returned excess in box 1 and a zero in box 2a.   Since a designated Roth did not reduce your 2019 taxable income, it does not get entered anywhere - keep it for your records.

[RussWill]

Thanks for the prompt reply macuser_22!  My apologies for the earlier typo.  

To clarify, I received two 1099-Rs.  One is for the return of the excess contributions to a Roth 401k of $2666.66 and has code P in Box 7 with $2666.66 in both Box 1 and Box 2a.  The 2nd 1099-R is for the earnings on the excess contribution of $1.74 and has code 8 in Box 7 with $1.74 in both Box 1 and Box 2a.

Based on the specifics of your wording, it appears my plan sponsor (VOYA) hasn't properly identified my 401k contributions as being "designated Roth".  If so, it appears the amount in Box 2a of the 1099-R with a code P for the excess contribution would be zero, correct?

If so, is this something I need the plan sponsor to correct and resend a revised 1099-R showing zero in Box 2a?  Or...since there's nothing to report/file for a return of excess contribution to a Roth 401K, can I ignore the fact there's an amount in Box 2a?  Are there any future ramifications for this between me and the IRS in the future when I start making tax free withdrawals from this Roth 401k?

Thanks in advance for any advice you can provide.

[RussWill]

Thanks for the prompt reply macuser_22!  My apologies for the earlier typo.  

To clarify, I received two 1099-Rs.  One is for the return of the excess contributions to a Roth 401k of $2666.66 and has code P in Box 7 with $2666.66 in both Box 1 and Box 2a.  The 2nd 1099-R is for the earnings on the excess contribution of $1.74 and has code 8 in Box 7 with $1.74 in both Box 1 and Box 2a.

Based on the specifics of your wording, it appears my plan sponsor (VOYA) hasn't properly identified my 401k contributions as being "designated Roth".  If so, it appears the amount in Box 2a of the 1099-R with a code P for the excess contribution would be zero, correct?

If so, is this something I need the plan sponsor to correct and resend a revised 1099-R showing zero in Box 2a?  Or...since there's nothing to report/file for a return of excess contribution to a Roth 401K, can I ignore the fact there's an amount in Box 2a?  Are there any future ramifications for this between me and the IRS in the future when I start making tax free withdrawals from this Roth 401k?  In other words, will the amount in Box 2a corrupt my plan in the eyes of the IRS and restrict future tax free withdrawals?

Thanks in advance for any advice you can provide.

[macuser_22]

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@RussWill wrote:

Thanks for the prompt reply macuser_22!  My apologies for the earlier typo.  

To clarify, I received two 1099-Rs.  One is for the return of the excess contributions to a Roth 401k of $2666.66 and has code P in Box 7 with $2666.66 in both Box 1 and Box 2a.  The 2nd 1099-R is for the earnings on the excess contribution of $1.74 and has code 8 in Box 7 with $1.74 in both Box 1 and Box 2a.

Based on the specifics of your wording, it appears my plan sponsor (VOYA) hasn't properly identified my 401k contributions as being "designated Roth".  If so, it appears the amount in Box 2a of the 1099-R with a code P for the excess contribution would be zero, correct?

If so, is this something I need the plan sponsor to correct and resend a revised 1099-R showing zero in Box 2a?  Or...since there's nothing to report/file for a return of excess contribution to a Roth 401K, can I ignore the fact there's an amount in Box 2a?  Are there any future ramifications for this between me and the IRS in the future when I start making tax free withdrawals from this Roth 401k?  In other words, will the amount in Box 2a corrupt my plan in the eyes of the IRS and restrict future tax free withdrawals?

Thanks in advance for any advice you can provide.

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Are you sure that this was a 401(k) Roth (Designated Roth) and not a Traditional 401(k) plan?   Your 1099-R's appear correct for a non-designated Roth.     They are reporting an ordinary 401(k) excess in which case you enter the code P 1099-R in an amended 2019 tax return and the box 2a amount will be added to your 2019 wages.

Check your 2019 W-2 box 12 - if code D then it was a ordinary 401(k) contribution.  401(k) Roth (designated Roth) will have a code AA in box 12.

[RussWill]

Thanks again for the prompt response macuser_22!  It is truly appreciated.

Yes - I'm positive all of the 401k contributions were made to a designated Roth as evidenced by code AA in box 12 of both my 2019 and 2020 W-2s.  

I am a fairly new member to this 401k plan as I changed employers in Nov 2019.  Is the plan sponsor indicating a taxable amount in Box 2a because this corrective distribution is somehow being deemed an early withdrawal because it happened in the first year of me being part of this plan?  Also,  I am not over 59 1/2...does that have anything to do with it?  Even so, it seems code B should be in Box 7 somewhere acknowledging this 1099-R is associated with a Designated Roth, right?  But more to the point, what else can make this corrective distribution from a Roth 401k taxable (Box 2a)?  It seems my plan sponsor has made a mistake, or I am being taxed for correcting an excess contribution that occurred in Year 1 of my participation in a new Roth 401k plan.  The latter doesn't sound right since changing employers is one of the main reasons these excess contributions happen in the first place.

Like you, I'd be hesitate to think a large plan sponsor would make a mistake.  However, I'm not convinced I should be taxed on a withdrawal of a contribution from a Roth 401k plan...even an excess contribution.  I do expect to be taxed on the earnings from that withdrawal because it's been within 5 years and I'm under 59.5. 

I'm hopeful this additional info will assist.  Thanks again for your help.

[macuser_22]

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@RussWill wrote:

Thanks again for the prompt response macuser_22!  It is truly appreciated.

Yes - I'm positive all of the 401k contributions were made to a designated Roth as evidenced by code AA in box 12 of both my 2019 and 2020 W-2s.  

I am a fairly new member to this 401k plan as I changed employers in Nov 2019.  Is the plan sponsor indicating a taxable amount in Box 2a because this corrective distribution is somehow being deemed an early withdrawal because it happened in the first year of me being part of this plan?  Also,  I am not over 59 1/2...does that have anything to do with it?  Even so, it seems code B should be in Box 7 somewhere acknowledging this 1099-R is associated with a Designated Roth, right?  But more to the point, what else can make this corrective distribution from a Roth 401k taxable (Box 2a)?  It seems my plan sponsor has made a mistake, or I am being taxed for correcting an excess contribution that occurred in Year 1 of my participation in a new Roth 401k plan.  The latter doesn't sound right since changing employers is one of the main reasons these excess contributions happen in the first place.

Like you, I'd be hesitate to think a large plan sponsor would make a mistake.  However, I'm not convinced I should be taxed on a withdrawal of a contribution from a Roth 401k plan...even an excess contribution.  I do expect to be taxed on the earnings from that withdrawal because it's been within 5 years and I'm under 59.5. 

I'm hopeful this additional info will assist.  Thanks again for your help.

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Then the IRS will surely question why you did not report and pay the tax on the 1099-R for 2019.   You should attempt to get a corrected 1099-R with the returned amount in box 1 , zero in box 2a and code PB in box 7.  

The code 8 is correct regardless of the type of account since it only reports the earnings taxable in the year returned so the type of account is irrelevant.

[macuser_22]

For reference see https://www.irs.gov/instructions/i1099r

Corrective Distributions

You must report on Form 1099-R corrective distributions of excess deferrals, excess contributions and excess aggregate contributions under section 401(a) plans, section 401(k) cash or deferred arrangements, section 403(a) annuity plans, section 403(b) salary reduction agreements, and salary reduction simplified employee pensions (SARSEPs) under section 408(k)(6). Excess contributions that are recharacterized under a section 401(k) plan are treated as distributed. Corrective distributions must include earnings through the end of the year in which the excess arose. These distributions are reportable on Form 1099-R and are generally taxable in the year of the distribution (except for excess deferrals under section 402(g)). Enter Code 8 or P in box 7 (with Code B, if applicable) to designate the distribution and the year it is taxable.

Use a separate Form 1099-R to report a corrective distribution from a designated Roth account.

Excess deferrals.

Excess deferrals under section 402(g) can occur in section 401(k) plans, section 403(b) plans, or SARSEPs. If distributed by April 15 of the year following the year of deferral, the excess is taxable to the participant in the year of deferral (other than designated Roth contributions), but the earnings are taxable in the year distributed. Except for a SARSEP, if the distribution occurs after April 15, the excess is taxable in the year of deferral and the year distributed. The earnings are taxable in the year distributed. For a SARSEP, excess deferrals not withdrawn by April 15 are considered regular IRA contributions subject to the IRA contribution limits. Corrective distributions of excess deferrals are not subject to federal income tax withholding or social security and Medicare taxes. For losses on excess deferrals, see Losses, later. See Regulations section 1.457-4(e) for special rules relating to excess deferrals under governmental section 457(b) plans.

Box 2a

Corrective distributions.

Enter in box 2a the amount of excess deferrals, excess contributions, or excess aggregate contributions (other than employee contributions or designated Roth contributions). See Corrective Distributions, earlier.

[RussWill]

Thank you for the information and for your time and assistance with this matter.  It is very much appreciated!

[zd11]

My husband contributed $300 more in 2021's Roth 401K after he switched jobs last year. We just filed our tax retern. What should he do now? Any input is greatly appreciated.

[GeorgeM777]

Depending on the circumstances, a taxpayer may be able to eliminate an excess contribution attributable to a regular contribution to a Roth IRA by several methods; however, for you and given the amount at issue, perhaps the best option is to make a corrective distribution.  

The corrective distribution is not taxable, and it eliminates the 6% excise tax entirely.  Income earned on the excess contribution while it was in the Roth IRA is also distributable and is taxable.   An early-distribution penalty may be imposed on the distributed earnings if no exceptions apply.  

At this point, there is no need to amend your 2021 tax return.  If you decide to make the corrective distribution, such distribution will take place in 2022 and therefore, you will receive a 1099-R (or similar document) showing the 2022 distribution.  When you prepare your 2022 tax return, you will see pages in TurboTax that will ask you whether you had withdrawn the excess contribution by the due date.  If you indicate that you withdrew the excess contribution, TurboTax will not create Form 5329.  If you do not withdraw the excess contribution, then TurboTax will generate Form 5329 which shows the excise tax imposed on the over contribution amount.  The 1099-R should show the excess contribution withdrawal to the IRS.

Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. The tax can't be more than 6% of the combined value of all your IRAs as of the end of the tax year.

To avoid the 6% tax on excess contributions, you must withdraw:

• the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and
• any income earned on the excess contribution.

@zd11

[Ak3221]

Hi,

I couldn’t withdraw my excess contribution to Roth 401k in time, and I am not clear on should be my next steps. Can you please share?