My company failed their 401K audit and those of us that are "Highly Compensated Employees" are limited by a maximum percentage of the total that can be contributed to our 401K accounts. So the amount over the allowable amount in our company was returned. I did not exceed the limit according to the rules of total amount one can contribute, including the catchup, I am limited by the rules of HCE cannot exceed a % of total.
I am contributing 100% as Roth while my company's match is pre-tax. The amount of the over the limit that has been returned to me (box 1 Gross Distribution) is $7645. Box 2a is blank, box 2b Taxable amount not determined, is checked. Box 4 Federal Income tax withheld is $92.41. box 5 Roth contributions is $6,721. Box 7 distribution code is 8B, 8 is "return of contribution taxable in 2024 and B is Designated Roth account distribution.
My issue when I put in the $7645, my tax owed goes up as if the whole amount is being taxed. It doesn't consider that I already paid tax on the $6721 I contributed after tax that is being returned. Did my 401K provider fill something out incorrectly or is TT not working correctly or do I not understand the tax rules?
When Roth contributions are returned, should I be taxed on them? If I took a distribution from my Roth account, I wouldn't be taxed would I? I'm 62 years old and have had my Roth for more than 5 years.
