401K Over Contribution - Distributed Earnings on Form 1099-R

[MNYL]

Hi Sir or Madam,

I over contributed to my 401K account in 2023.  Understood that I will get the amount withdraw plus earnings from the financial company asap.  I will include the distributed amount in my 2023 return so I won't need to amend later.  Question is the 1099R receives in Jan 2025  (for earnings distributed, Code 8),  besides the regular taxes, any penalty will incur?  Can I pay taxes in advance to cover any extra will incur when I do tax 2024 return ?

Please kindly advise.

Thank you!!

[fanfare]

return of excess contribution:

before tax filing date including extension: positive earnings allocable to the excess are taxable on the Line 4b for the year of the contribution. negative earnings are ignored; in which case, for purposes of basis, consider the original requested amount as returned.

You must have a) filed by tax day, or b) requested an extension of time to file by tax day to take advantage of the Oct 15 deadline.

positive earnings removed are no longer penalized 10% when you are under age 59 1/2. (eliminated in 2023)

@MNYL 

[MNYL]

Thank you!  Just want to confirm the 401K over contribution earnings distributed (which I should receive before 4/15/24), I will include the amount on tax return 2023, 1040 Line 4b, (IRA taxable amount)?  However, this is the 401K distribution for over contribution, still report on this same line?  Please clarify.  Thank you!

[DanaB27 · Accepted solution]

No, the earnings on a 401(k) excess deferral for 2023 will be reported on your 2024 tax return. You will enter the 2024 Form 1099-R with code 8 on your 2024 tax return and it will be added to line 1h. There will be no penalty.

Please follow the steps below to enter the excess deferral on your 2023 return:

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down "Less common income" and click "Start" next to "Miscellaneous Income, 1099-A, 1099-C"
4. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
5. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
6. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
7. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
8. On the "Any Other Earned Income" screen enter "2023 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 2024 tax filing due April 15, 2025: 

Two 2024 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 2023. 
• However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2024.

Please be aware, if you do not take out the excess 401(k) 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.

Please see Pub 525 additional information.

[MNYL]

Thank you so much DanaB27 for confirming there won't be any penalty fee for reporting the distributed earnings when report on tax return 2024 next year.  I will be waiting for the distribution of the excess contribution and earnings before I file tax for 2023.  Will seek advice again if I come across any issue.  Many thanks for the assistance!

[MNYL]

Sorry one other question, I will withdraw from my after tax Roth 401K as my pre tax transitional 401K already max the $22,500.   Same steps to enter the excess deferral on my 2023 return as noted by your step by step procedure?  Noted that the amount had been taxed when putting into the Roth after tax 401K account.  Any steps on reporting differently, please kindly advise.  Many thanks!

[DanaB27]

No, excess contributions to the Roth 401(k) are not added to the wages since they are after-tax funds as long as your receive the excess by April 15th, 2024.

Therefore, you don't have to do anything on your 2023 return. 

[MNYL]

Thanks Dana!  Just want to confirm the after tax Roth 401K amount had already been counted under the wages in W2, so no need to add or amend anything when I receive the excess distribution and earnings to my 2023 filing before 4/15/24.     

All I need to report would be the earnings on next year's tax return for 2024 (no penalty on these earnings and I will be taxed on the earnings as income in 2024, correct?).  Many thanks for your assistance!

[DanaB27]

Yes, that is correct.

[MNYL]

Hello, I would like to ask after distributing from my Roth 401K, I will still be receiving the 1099R next year but still not needed to report in tax return 2024.  Only need to report the 1099R from the distributed earnings for tax return 2024 when conducts in 2025, correct?

If my company allows pre tax 401K and Roth after tax 401K contribution, which type would be better off to contribute in, for future retirement.

Many thanks!

[DanaB27]

Yes,  you can ignore the 2024 Form 1099-R with code BP for the distribution of the excess to the Roth 401(k). 

Yes, you will have to report the 2024 Form 1099-R with code 8 for the earnings on your 2024 tax return.

It depends, on your situation and preference. If you prefer to be able to withdraw the contributions and earnings tax-free (Qualified distribution) when retired then the Roth is better.  Please review the IRS Roth 401(k), Roth IRA, and Pre-tax 401(k) Retirement Accounts chart.

[MNYL]

Hello Dana and All,

I could see my refund of the excess deferral has the earnings as taxable amount.  Is there a way I can withhold federal and state taxes to avoid paying more taxes (just in case) next year when I have to report the 1099 R earnings on 2024 return?  Many thanks!

[DanaB27]

You can contact the plan administrator to have taxes withheld with the earnings distribution.

Or you can make estimated tax payments. Please see How do I make estimated tax payments?