401k over contribution - reimbursement after tax filing

[JFolena]

Hello,

I mistakenly over contributed to my 401k last year (2022), as I started a new job in April and did not calculate the amount already withdrawn by my previous employer. When I filed my taxes this year (TurboTax) it flagged me that I over contributed. This was at the beginning of April 2023. I brought it to my employers attention, but they were not able to resolve this in time, so I filed my taxes as normal. After 2 months, the 401k company finally refunded me my money, but taxed me the 10% early withdrawal, and the taxes on the money (based on my state and fed tax brackets).  I basically received half of the 401k money ($6k). My question is, do I need to amend my return and report this $6k as income, or do I add it to my return in 2024?  The 401K company is telling me I paid taxes on it, so to do not have to report it.  Want to be certain....  Thank you for your advice. 

[Critter-3]

You did NOT already pay taxes on the distribution ... there was WITHHOLDING for state/fed taxes just like you have on wages.   Next January you will get a form 1099-R showing the entire distribution  and the withholding that you MUST report on your tax return ... failure to do so will result in an IRS audit letter. 

On the 2022 return the excess contribution would have been added back into the wages on line 1 of the form 1040 where you paid taxes on that amount.  Then since you did not get the excess refunded timely you will also pay taxes on the distribution  you just took and  you will also be accessed a 10% penalty for the early distribution. 

[JFolena]

Thank you for the information. The 401K company said they already deducted the 10% early distribution. I hope I don't get dinged twice.  😉

I will then wait for the 1099-R for 2024.  Thank you!

[SteamTrain]

@JFolena 

The extra 10% they withheld, just gets added into all your other withholding to be used against any taxes you may owe for 2023.  The IRS forms will still show that there is a 10% penalty that adds to your total tax liability, but any withholding you have already prepaid, will be used to help, or completely, pay that off. 

But in the end, if you've overpaid taxes during the year, from any payments/withholding made for 2023...based on your total tax bill, including that penalty...then you will get a refund of some of it.....IF your total tax liability indicates you owe some more $$...then you will end up paying some more to the IRS when you file.

[dmertz]

Whatever was withheld for taxes will be credited on your federal and state 2023 tax returns.  The amount distributed is taxable on your 2023 tax returns.  This will all be done automatically in 2023 TurboTax when you enter the 2023 Form 1099-R that you will receive near the end of January 2024.  If you were under age 59½ at the time of the distribution, the entire distribution will be subject to a 10% early-distribution penalty on your federal tax return.  [Corrected]

[Opus 17]

Red alert.  $6000 was half your 401k contribution?  You most likely did not have excess contributions.

The 401k contribution limit for 2022 was $20,500, plus $6500 if you are over age 50.  Your employer may have lower limits but only if they fail certain testing procedures that they tell you about in the spring of the following year.  Your employer is also required to block excess contributions.  The only way to have an excess 401k contribution is to switch employers in mid-year so that the total contributed in both programs is more than your limit.

However, if you enter your 401k contribution in the "IRA" section of Turbotax, many bad things will happen.  If you told Turbotax that you made $12,000 or more of IRA contributions when it was really a 401k, you would have been told you had a $6000 excess.  A 401k is not an IRA, they are controlled by different laws and have different rules.  An IRA is a private account you set up with a bank or broker of your choice, not through your employer.

A 401k is only reported on your W-2, no where else.  If you tell Turbotax that you made IRA contributions when you really had a 401k at work, then you will be told incorrectly that you have excess that needs to be removed.  You will also take an incorrect tax deduction for your contributions when they were already tax-free from your employer on your W-2.

Please review your situation and post back with more information.  There are things you need to do to correct this, and some of them have time limits (60 days or less.)

[dmertz]

I interpreted that to mean that $6,000 was received in cash and $6,000 went to tax withholding for a total distribution of $12,000.

[Opus 17]

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@dmertz wrote:

I interpreted that to mean that $6,000 was received in cash and $6,000 went to tax withholding for a total distribution of $12,000.

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Could be.  If there was a $12,000 over-contribution between 2 employers, the state, federal and the 10% tax could be close to $6000.

However, 

Isn't it the case that if the taxpayer left the money in the 401k until retirement, they would pay income tax at that time but avoid the 10% penalty?  By insisting on processing the withdrawal after April 15, it becomes a taxable distribution. 

To be more specific: the taxpayer already pays income tax on the excess contribution on their 2022 tax return.  If they left the money alone, they would pay income tax in retirement, with no penalty.  By withdrawing the money now, they have it to spend now, but they pay income tax plus the penalty on their 2023 return.

Can they avoid the penalty if they reverse the distribution within 60 days and just let the money ride until they retire?