Excess contributions to 401k and 403b?

[taxquestioner12]

Hello,

I have two questions: Did we overcontribute to my wifes retirement accounts and why does TurboTax not show an error if so?

Scenario:

34-year-old wife (I am 35) switched jobs mid year 2020. Her first job only offered a 401k; her second job only offered a 403b. We just got her W2s. 

Her first employer lists box 12D as $3789.xx (401k)

Her second employer lists box 12E as $18695.xx (403b)

TurboTax 2020 did not throw an error at review for over-contribution. 

Am I over-thinking this?

Please help!

Thank you

[npierson7]

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is $19,500 for 2020. Your wife's overcontributed $2984. To avoid penalties you should notify your employer or the plan administrator immediately The excess deferral amount should be returned to you by April 15.

[taxquestioner12]

Thank you! We we will do that.

I did not receive an error in turbotax 2020 delux. Maybe that is on purpose or maybe a bug?

[dmertz]

TurboTax simply does not check for combined over-contribution between 401(k) and 403(b) plans.  It has never been a feature of TurboTax to do so.

(457(b) plans have an entirely separate limit even though it happens to be the same dollar amount as the limit for 401(k) and 403(b) plans combined.)

[donella-timm]

HI, I have a client who has a traditional 401k plan and the TSP.  Where in the tax code does it state that these are combined limit of the $19,500 for 2020? (They would like to max out both if possible of 19.5k each) I am having a hard time finding the specific ruling on it.

[dmertz]

5 U.S. Code § 8440 - Tax treatment of the Thrift Savings Fund

(a)For purposes of the Internal Revenue Code of 1986—

(1)the Thrift Savings Fund shall be treated as a trust described in section 401(a) of such Code which is exempt from taxation under section 501(a) of such Code;
(2)any contribution to, or distribution from, the Thrift Savings Fund shall be treated in the same manner as contributions to or distributions from such a trust; and
(3)subject to section 401(k)(4)(B) of such Code and any dollar limitation on the application of section 402(a)(8) of such Code, contributions to the Thrift Savings Fund shall not be treated as distributed or made available to an employee or Member nor as a contribution made to the Fund by an employee or Member merely because the employee or Member has, under the provisions of this subchapter and section 8351 of this title, an election whether the contribution will be made to the Thrift Savings Fund or received by the employee or Member in cash.

A 401(k) is a type of 401(a).

[amitbehari]

I over contributed by 10k and the informed my employer and plan manager and excess contribution was removed. How do I report it on 2022 taxes? 

[DanaB27]

Please follow the steps below to report the excess deferral on your 2022 tax return:

1. Login to your TurboTax Account 
2. Click "Wages & Income" (under Federal) on the left side of your screen
3. Scroll  down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
6. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
7. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
8. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
9. On the "Any Other Earned Income" screen enter "2022 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

If you receive the distribution of the excess deferral and earnings by April 15th then please note for the Tax Year 2023 tax filing due April 15, 2024: 

2023 Forms 1099-R will be issued reporting the excess.

• Form 1099-R with code P in box 7 can be ignored if you reported the excess as described above in 2022. 
• However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2023.

Please see Pub 525 for additional information.

@amitbehari 

[varunagrawal]

Thanks for clarifying that I need to have my employer return the excess employee contribution amount $900 that I made - what happens to the earnings (because the stock prices went up) that happen as a result of these excess contribution? Where does that go or get reported? 

[DanaB27]

You will get a Form 1099-R with Code 8 in box 7 for the earnings which you will enter into TurboTax.

Assuming that you made an excess contribution for 2023 that you will remove in 2024 then you will receive two 2024 Forms 1099-R reporting the excess:

• Form 1099-R with Code P in box 7 can be ignored if you reported the excess as described below on your 2023 tax return. 
• However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2024.

Please follow these steps to report a 2023 excess 401(k) deferral:

1. Login to your TurboTax Account 
2. Click "Federal" from the left side of your screen
3. Scroll down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
6. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
7. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
8. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
9. On the "Any Other Earned Income" screen enter "2023 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

Please be aware, if you do not take out the excess amount by April 15th, then you are taxed twice on the excess deferral left in the plan.  This happens once when you contribute it and again when you receive it as a distribution. You can't include the excess amount in the cost of the contract even though you included it in your income.