topic what does it mean by "distributed from you 401(k)s"? If e... in Retirement tax questions

Excess 401k contribution in 2017. But plan administrators don't let me withdraw!

ctak07 — Mon, 03 Jun 2019 19:02:05 GMT

Excess 401k contribution in 2017. I changed job in 2017 and after I inputted both W-2, I exceeded the 18k. I notified both plan administration and both don't let me withdraw the excess contribution. What should I do?

I also read the following from IRA, but don't get what that means:

"Excess not distributed. If you don't take out the excess amount, you can't include it in the cost of the contract even though you included it in your income. Therefore, you are taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution. " - https://www.irs.gov/pub/irs-pdf/p525.pdf (Page 10)

If they allowed me to withdraw, I would follow the following link to fix the issue: https://ttlc.intuit.com/questions/3877165-excess-401k-contribution-in-2016-should-i-report-it-using-...

Basically, the quote you included form IRS Publication 52...

Rachel_W — Mon, 03 Jun 2019 19:02:06 GMT

Basically, the quote you included form IRS Publication 525 is stating that if your excess 401(k) contribution is not taken out by the due date of your return, you will end up being taxed twice on the amount because they are not allowing you any type of basis when you are taxed the first time. So you are taxed on the excess contribution now AND when you take the money out in the future.

I would highly recommend talking to the plan administrators again and explaining the situation so that you can withdraw that money before April 17, 2018 and avoid the double taxation.

If you are able to withdraw the excess contribution in time, you can report the excess contribution on line 7 of your 2017 Tax Return without a Form 1099-R by following these steps:

Click on the "Federal Taxes" Tab
Click on the "Wages & Income" Tab
Click on "I'll choose what I work on"
Scroll down to "Less Common Income"
Select "Miscellaneous Income" and click Start or Update
Select "Other income not already reported on a Form W-2 or Form 1099" and click on Start
Answer the Question "Did you receive any other wages? Yes
Click through the questions until you get to "Any Other Earned Income"
Answer Yes to "Did you earn any other wages?
Indicate "Other" as Source of Other Earned Income and click Continue
For the description enter "2017 Excess 401K Deferrals" and click on Done

Note that, under these circumstances, neither employer is...

dmertz — Mon, 03 Jun 2019 19:02:07 GMT

Note that, under these circumstances, neither employer is *required* to make a return of excess contribution and there seem to be many employers who will not.

That does seem like the case. Both of my employers are no...

ctak07 — Mon, 03 Jun 2019 19:02:08 GMT

That does seem like the case. Both of my employers are not letting me withdraw. What should I do? Are there other ways to fix this?

If the employers are uncooperative, there is nothing you...

dmertz — Mon, 03 Jun 2019 19:02:09 GMT

If the employers are uncooperative, there is nothing you can do. You'll pay taxes on the excess amount in 2017 and the money will again be taxed when distributed from your 401(k)s. Hopefully the amount of the excess was not substantial.

what does it mean by "distributed from you 401(k)s"? If e...

ctak07 — Mon, 03 Jun 2019 19:02:10 GMT

what does it mean by "distributed from you 401(k)s"? If employer don't cooperate, does that mean, I have to pay penalty every year till I retire and withdraw money?

No, there is no excess-contribution penalty on this in 20...

dmertz — Mon, 03 Jun 2019 19:02:11 GMT

No, there is no excess-contribution penalty on this in 2017 or any other year.

Someday you will make distributions from your 401(k)s. As TurboTaxRachelW indicated, the excess amount on which you paid taxes in 2017 is not treated as after-tax basis in your 401(k)s, so you simply pay taxes again on the same money when eventually distributed as part of a regular distribution.

I'm in the same situation. Let's say the overcontributio...

Anonymous — Mon, 03 Jun 2019 19:02:12 GMT

I'm in the same situation. Let's say the overcontribution was $1000. Do you pay taxes the second time during distribution (at time of retirement) on that $1000, or is it also on the earnings? Thanks!

@paulnelsonee - Earnings in a 401(K) are always taxable...

macuser_22 — Mon, 03 Jun 2019 19:02:14 GMT

@paulnelsonee - Earnings in a 401(K) are always taxable when when withdrawn. The $1,000 just becomes part of the before tax contributions (even thought you have paid tax on it once already) so you will pay tax on the same $1,000 again when distributed - that is the penalty for failing to timely removing an excess contribution.

Thank you for the reply. I have a Roth 401K so taxes are...

Anonymous — Mon, 03 Jun 2019 19:02:15 GMT

Thank you for the reply. I have a Roth 401K so taxes are paid upfront. What I'm trying to find out is if taxes will be paid on the principal of $1000 or earnings as well. For a Traditional 401K, I agree with you. I did a bit more digging. According to the IRS, it looks like I can have the funds removed and pay a 10% penalty: <a rel="nofollow" target="_blank" href="https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-limits-for-the-calendar-year-and-excesses-were-not-distributed">https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-exceeded-code-402g-limits-for-the-calendar-year-and-excesses-were-not-distributed</a>

Per that publication: "For any distributions, attributabl...

macuser_22 — Mon, 03 Jun 2019 19:02:16 GMT

Per that publication:
"For any distributions, attributable to elective deferrals designated as Roth Contributions, all distributions will be reported as taxable in the year distributed. Designated Roth contributions will have already been included in income in the year of deferral."

Which means that when distributed the amount of excess plus and earnings will be included in your income as taxable income.

The 10% is not an alternative. The 10% is an ADDITIONAL early distribution penalty in addition to the normal tax that applies if you are under age 59 1/2 at the time of the distribution for late distributions of excess contributions not withdrawn by the due date of the tax return.

Thanks for the reply. Understood that 10% is an addition...

Anonymous — Mon, 03 Jun 2019 19:02:17 GMT

Thanks for the reply. Understood that 10% is an additional early distribution penalty. Bottom line: I want to have the excess funds removed asap rather than leave them in the account, correct?

I think that correcting an excess Roth 401(k) contributio...

dmertz — Mon, 03 Jun 2019 19:02:18 GMT

I think that correcting an excess Roth 401(k) contribution for 2017 needed to be done by April 15, 2018. I don't think that there is anything that can be done about it now unless the employer is required to make the correction.

I think it's still necessary to tell the employer about t...

dmertz — Mon, 03 Jun 2019 19:02:19 GMT

I think it's still necessary to tell the employer about the excess contribution. According to the above-referenced IRS web page, the distribution of an excess contribution after April 15 is taxable even though it was a contribution to the Roth 401(k). The excess Roth IRA contribution does not add to the contribution basis. The consequences are the same as if the excess was an excess deferral to the traditional 401(k) account: double taxation of the excess contribution and a 10% early-distribution penalty on the distribution if made before age 59½. You can't make the withdrawal until you have a triggering event, either reaching age 59½, becoming disabled or leaving the company.

Had the distribution of the 2017 excess been done by April 15, 2018, none of the distribution, including the attributable earnings, would be subject to an early-distribution penalty. An early-distribution penalty on the earnings distributed with a return of contribution by the due date of the tax return only happens with a return of contribution from an IRA.

How do you file your taxes if the employer says they are...

2manydogs — Mon, 03 Jun 2019 19:02:21 GMT

How do you file your taxes if the employer says they are not going to return the excess?

@2manydogs - The same way as above if you missed the date...

macuser_22 — Mon, 03 Jun 2019 19:02:22 GMT

@2manydogs - The same way as above if you missed the date to have the excess removed or if you had two different employers then neither is *required* to return it. It just stays in the account and will be taxed again when finally distributed - in the mean time it can produce earnings in the account.

For information see IRS Pub 525 page 10 excess not removed.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p525.pdf">https://www.irs.gov/pub/irs-pdf/p525.pdf</a>

Okay thank you so much!

2manydogs — Mon, 03 Jun 2019 19:02:24 GMT

Okay thank you so much!

Re: No, there is no excess-contribution penalty on this in 20...

master_d — Thu, 13 May 2021 00:32:49 GMT

I have this issue for 2020 taxes where I have excess 401k contributions across 2 different 401k providers and both providers refuse to distribute the excess deferrals saying that excess deferral requests must be made before 4/15 even though the tax deadline was extended to 5/17 for 2020. A turbotax advisor said that I will be taxed 6% on the excess 401k contributions until I'm able to get a disbursement of the excess amount. Is that true? If so that's horrifying and would potentially cause me to pay more in taxes than I ever contributed in the first place.

Re: No, there is no excess-contribution penalty on this in 20...

macuser_22 — Thu, 13 May 2021 00:48:19 GMT

@master_d wrote:

I have this issue for 2020 taxes where I have excess 401k contributions across 2 different 401k providers and both providers refuse to distribute the excess deferrals saying that excess deferral requests must be made before 4/15 even though the tax deadline was extended to 5/17 for 2020. A turbotax advisor said that I will be taxed 6% on the excess 401k contributions until I'm able to get a disbursement of the excess amount. Is that true? If so that's horrifying and would potentially cause me to pay more in taxes than I ever contributed in the first place.

You were given incorrect information. The 6% penalty applies to IRA's, not 401(k)'s.

Although this thread is several years old the tax law has not changed. You must still report the excess on your 2020 tax return as taxable wages, and has been said before in this thread, when you retire and take distribution it will be taxes again as ordinary income.

You do not pay more in tax than the contribution. Since the contribution was not included in your taxable wages you must include it now. That will increase your tax somewhat.

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 wages on line 1 on the 1040 form.

Re: No, there is no excess-contribution penalty on this in 20...

master_d — Thu, 13 May 2021 01:04:06 GMT

Cool thank you for the information. I actually don't mind paying taxes twice for this since the excess contribution resulted in the max company match and I couldn't have gotten there without an excess deferral