401k Overcontribution: Options & Deadlines?

townie — Mon, 09 Oct 2023 02:42:12 GMT

Hi all,I noticed that I over-contributed to my 401k because of a change of employers. Let me please describe the details below, and I will appreciate your help in understanding my options. I will mark my questions red to help structuring the conversation.
I am also including links to IRS publications that seem relevant for the community's benefit.

At my first employer in 2022, I made the following 401k contributions:

Pre-tax: $16,400.00

Roth: $4,100.00

(Total: $20,500.0)

At my second employer:

Employer Match: $9,000.00 (rounded)

After-Tax (Backdoor): $5,000.00 (rounded)

Pre-Tax: $632.70

Roth: $12,925.02

Q1.a:( My understanding that the amount in the second 401k that counts towards the $20,500 IRS limit is $632.70 + $12,925.02 = $13,557.72, and the employer and back-door parts are not in the picture, correct?

Q2.b) Since the first 401k was already maxed out, the $13,557.72 is exactly the overall over-contributed amount in 2022, correct?

Assuming the above is correct, I am now trying to understand the best course of action.

I already done some investigating:

- I reached out to the first 401k account administrator and asked if contributions can be reversed, but they declined it citing administrative procedures.

- Reversing the second company's 401k contributions is pointless because even if it was possible, what I might gain in avoiding tax penalties, I'd lose by undoing the employer match, which would need to be reversed as well.

- I learned that I could withdraw the overcontributed amount (plus any capital gains) from any of the two accounts (I'd choose the first one). If I understand correctly (validating this understanding is my Q3), if the money is withdrawn before the tax deadline, then I can avoid double taxation. In that case the money would need to be taxed as 2022 W2 income, and the early withdrawal penalty would be avoided. Correct?

However, if I do this any time after the tax deadline, then the money (plus any capital gains) would be taxed as 2023 income (or whichever year I do the withdrawal) and I'd pay an additional 10% early withdrawal penalty.

Q4) My next step is to understand what the applicable tax deadline is: Several online forums imply that it has already passed on April/18. However, this IRS publication appears to say that the upcoming extended tax deadline is applicable (see section "Excess Contributions Withdrawn by Due Date of Return"). (I have filed for the tax extension.)

Which deadline applies will probably determine my next steps:

- (Q5.a) If it passed, I will need to understand the consequences of withdrawing the over-contributed amount now vs. later.

- (Q5.b) If there is still time, I will need to understand how I can compute the exact amount to withdraw to correctly account for capital gains (they are actually small capital losses this year).

I am looking forward to learning more.

Re: 401k Overcontribution: Options & Deadlines?

Anonymous_ — Thu, 12 Oct 2023 15:49:41 GMT

@dmertz?

Re: 401k Overcontribution: Options & Deadlines?

dmertz — Thu, 12 Oct 2023 16:18:53 GMT

Yes, all of your traditional elective deferrals and Roth contributions at the second employer are excess contributions.

The statutory deadline for obtaining a corrective distribution is April 15 of the following year, not the due date of the tax return for that year. The April 15, 2023 deadline for obtaining a corrective distribution has passed, so the excess traditional elective deferral to the second employers plan must be included in income on your 2022 tax return because the employer excluded that amount from box 1 of your W-2 and must appear on Form 1040 line 1h. When eventually distributed, both the traditional and Roth excess contributions and their attributable earnings will be taxable, resulting in double taxation of the excess amount. Regular distributions from the traditional 401(k) will naturally be taxable but you'll need to keep track of your Roth excess and attributable earnings so that they can be appropriately taxed when distributed. When making distributions, the excess amount and attributable earnings come out first and are not eligible for rollover.

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401k Overcontribution: Options & Deadlines?

Re: 401k Overcontribution: Options & Deadlines?

Re: 401k Overcontribution: Options & Deadlines?