I need help with my 2023 Excess Deferral and Tax Treatment in TT

[johnjames9]

Good Morning Tax Experts!

I made an excess deferral of $1,200 to my 2023 401K. I just noticed this today as I was doing my return. It is too late to contact with the employer or the 401K administrator to make any changes. My question for the experts is how do I handle this excess deferral in Turbo Tax step by step. Also, once I report this excess deferral and pay taxes on it then I do not need to do anything else (such as informing the employer or the benefits administrator), correct?

Thank you in advance!

[DanaB27]

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 (with the steps below) 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.

You should check with your plan administrator if you need to still remove the excess or can leave it in the account since the deadline has passed.

You must include the excess deferral in your wages in the year the excess deferral happened. 

Please follow the steps below:

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 "2023 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

Please see Pub 525 for additional information.

[johnjames9]

Please can you clarify what you mean by "You can't include the excess amount in the cost of the contract even though you included it in your income"?

[DanaB27]

This means that the distribution will be fully taxable, you cannot claim that you already paid taxes on this excess amount. Therefore, you are taxed twice on the excess amount.

[johnjames9]

I see. So only when I take the distribution then it will be taxed again and that could be a day from today or 20 years from today, correct?

[DanaB27]

Yes, if your plan allows it to stay in the account.