Steps to manage 401a After-Tax over-contribution

[xilex]

Hello, I have a 401a account at my workplace. It comprises of mandatory employee pre-tax contribution with employer matching, and also an after-tax component. I regularly contribute to this after-tax component and then rollover to a Roth IRA account.

It was challenging to determine exactly how much the pre-tax contributions would end up at the end of the year, so now I am over the contribution limit ($61000 for 2022 I believe). Some of it remains in the 401a, the another portion is in the Roth IRA, but uninvested. My account is with Fidelity, and I was instructed to fill out the Return of Excess Contributions form next year.

I plan to do this before tax filing day. The money, by default, sits in some money market account, so it slowly accumulates a small amount. Let's say I end up having to remove excess contributions from both 401a and Roth IRA, and both have tiny amounts of appreciation, and this is done in January 2023. Will Fidelity send me 1099-R form that I can use for filing 2022 taxes? Or will I get 1099-R next year (January 2024), and then it will get added to gross income for 2023 taxes? In other words, will I have to input something for 2022 taxes?

Thank you.

[Anonymous_]

@dmertz 

[dmertz · Accepted solution]

First, any distributions that occur in 2023 will be reported on 2023 Forms 1099-R that you will receive in early 2024.

See https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-failure-to-limit-contributions-for-... 

My biggest question is which portion of the 2022 additions is considered to have the excess contribution.  I'm guessing a bit here, but it seems that the excess was in the after-tax contribution.  If the rollover to the Roth IRA of the after-tax sub-account was immediate, there would have been no gain while in the after-tax sub-account.  The distribution from the after-tax sub-account would have included the  excess and that excess now constitutes an excess contribution to the Roth IRA.  For the distribution from the after-tax sub-account that was deposited into the Roth IRA I would guess that Fidelity would report on 2022 Forms 1099-R with code G  for the portion rolled over that was not excess and code 8 the portion that was excess;  Fidelity should already know that you had total additions for 2022 exceeded $61,000 and I would expect them to treat part of the distribution as a return of the excess.  If there were any investment gains before the rollover to the Roth IRA, the gains should be considered to have been distributed as part of the distribution that was rolled over, so I would guess that they would be shown in box 2a of the 2022 code-8 Form 1099 and will be taxable on your 2022 tax return.  You'll really need to confirm all of this with Fidelity, though.  (Except for the involvement of after-tax contributions, this seems similar to a situation where an excess contribution resulted from a failure of ACP or ADP testing and there was an intervening rollover to a Roth IRA.)

For a return of excess contribution from the Roth IRA in 2023, the 2023  Form 1099-R will have codes J and P.  Investment gain or loss is calculated across the entire account.  The amount distributed will be the excess adjusted for investment gain or loss.  If there is a gain, that gain will be shown in box 2a of this Form 1099-R and will need to be included in income on your 2022 tax return.  (Makes sure not to have any taxes withheld from this return of contribution.  Tax withholding would be credited on your 2023 tax return even though the corresponding taxable income is reportable on your 2022 tax return.)

[xilex]

Thank you for taking the time to provide such a detailed response, @dmertz !

Your assumption is correct, that all the excess contribution is in the after-tax contributions. I calculate that I have over-contributed by $10420. $5000 in the 401a account, and the remainder in the Roth IRA. Some of the money is sitting in this default money market account, and it gains a minuscule amount each month by default, so even during the rollover, $5000 accumulates a few dollars that get taxed (per Fidelity). When I spoke to Fidelity, they said they do not check for any after-tax contributions in excess.

Since my last paycheck occurs at the beginning of December, I think I will speak with Fidelity to take care of this excess contribution return in mid-December. It sounds more simple to keep it all in one year, rather than having to do some stuff on 2022 return, and then the credit of tax withholding on 2023 returns. That sounds like I would have to remember to put in TurboTax 2023 somewhere.

[aybiz]

My situation is related but not the same as the original post.

Any advice would be appreciated --

Fidelity informed me in early May 2023 that there is a return of excess contribution from my 401k contribution in 2022.  In 2022, I made 401K after tax contribution with immediate Roth in-plan conversion.

In mid May 2023 Fidelity sent me a check of ~$9000. (all numbers rounded)

Documentation:

A table  showing in row 1 "Total Distribution $9000, Roth = $9000 and Non Roth = $0, and row 2 "Return of Roth After-Tax Contribution" = $9000, Roth = $9000 and Non Roth = $0 . 

A table showing  Gross is $9000, Non Taxable is $11000, employee contribution loss is $2000, and net is $9000.

Fidelity says I'll receive form 1099-R but I haven't received it.

1. Do I report this item in 2022 tax return or 2023 tax return?

2. How do I report it in turbo tax?

3. Since the return is after tax and there was a loss, I assume I won't need to pay tax on it?

4. Can I take short term capital loss of $2000?

Thanks!