maximum contribution to 401k (Tax Year 2021)

[starfisht]

In 2021 I changed employers, so I have two w-2's. The w-2 from the second employer shows that I maxed out 401K contributions at 19500. I also had made some 401K contributions at the first employer and that w-2 shows it. So the total is well over 19500. I will be in the same situation for 2022. What is the maximum allowable total contribution for a year when there are multiple employers in the same year?

[AamilD · Accepted solution]

There are 2 limits which you need to be aware of.

The first limit is for you, the employee. You can contribute up to $19,500 to your 401(k)  in 2021. This is the total limit. So even if you have multiple jobs, $19,500 is the maximum you can contribute. You cannot contribute $39,000 ($19,500 x 2) if you have 2 jobs. The maximum still stays at $19,500

The second limit is for the the total employer and employee contributions. The total limit for 2021 for the employer and employee contributions is $58,000.

From your post, it seems like you over contributed as you stated that you contributed $19,500 with your second employer and you also did some 401k contributions with your first employer. To correct this, you will need to contact your employer or your plan administrator immediately. This way, your excess contributions are returned to you.

Additionally, if the excess amount was deferred on a pre-tax basis ( Traditional 401k), your employer must amend your W-2 Form to show the returned amount as wages. Also, any earnings you made on that excess contribution should also be returned to you and those earnings should also be included in your taxable income. 

One very important thing to be aware of is that you’ll end up paying taxes twice on the amount over the limit if the 401(k) overcontribution isn’t paid back to you by April 15 so it is important that you contact your employer soon.

[starfisht]

OK, thanks. Let me just make very clear what happened and make sure I understand your advice. 

I made a contribution to my traditional 401K while I worked for the first employer. So the w-2 does not include that income as taxable in the box 1 wages.

I made the maximum 19500 contribution while I worked for the second employer.

You're saying that the first contribution amount is above the allowable annual maximum. Therefore I need to request that the contribution be returned to me and that the w-2 be amended so that the box 1 wages includes the returned amount. Is that correct?

That makes sense, I understand and will do. Just curious, why would I pay taxes twice on the over contribition?

[DianeW777 · Accepted solution]

The reason you would pay twice is because of the excess deferrals over the maximum allowed amount if you don't get it out (PLUS earning on that amount) before April 15, 2022.  

• See Issue Snapshot-Consequences of a Plan Participant Who Makes Excess Deferrals to a 401(k)

Unless timely distributed, excess deferrals are:

(1) included in a participant’s taxable income for the year contributed, and

(2) taxed a second time when the deferrals are ultimately distributed from the plan. 

• '.....excess deferrals, along with amounts earned on the excess deferrals during the calendar year during which the deferrals are made without regard to income earned during the “gap period” between the close of calendar year in which the excess contribution was made and the time of actual corrective distribution. See IRC Section 402(g)(2)(A)(ii). Additionally, the corrective distribution must be made be made no later than April 15th following the close of the calendar year during which the excess deferral was made.

[starfisht]

Thank you for explaining how it gets double-taxed.

"The corrective distribution must include the amount of the excess deferrals, along with amounts earned on the excess deferrals"

I get it that the excess contribution has to be returned to me and that the W-2 box 1 wages has to be increased by that same amount. I'm confused by the reference to "amounts earned"? Does that mean that I have to figure out exactly when in the year the amount contributed went over $19500 and then determine how much it generated in invested income? I hope I'm misinterpreting it because that would be difficult to do.

[MarilynG1]

If you had $19500 contributed to your 401K with your second employer, ask the first employer refund the entire amount of 401K contributions you made there.

You don't have to figure out when in the year your over-contribution occurred.

If you don't receive your corrected W-2 by tax filing deadline, you can report the amount you over-contributed as Other Income Not Reported on a W-2 or 1099.

You'll get a 2022 Form 1099-R to report the overcontribution refunded to you, but since you have already added it to your 2021 income (either by Corrected W-2 or 'Other Income'), only the Earnings will be taxable for 2022. 

Click this link for more info on Excess 401K Contribution. 

[starfisht]

Thank you, Marilyn,

Just one question. 

"If you don't receive your corrected W-2 by tax filing deadline, you can report the amount you over-contributed as Other Income Not Reported on a W-2 or 1099."

If I don't receive the corrected W-2 by tax filing deadline (April 15), can't I simply delay filing until I get it? (I will file an extension if necessary.)

[AamilD]

@starfisht, it would be a good idea to confirm with your employer/payroll department that they will issue you a corrected W-2 before filing for extension, since a lot of companies due to various reasons may not issue a corrected W-2. 

As @MarilynG1 stated, if you don't get the corrected W-2, you can report the amount you over-contributed by entering it in the "Other Income Not Reported on a W-2 or 1099."

Additionally, if you do receive the corrected W-2, then don't report the excess contribution as income since you will be getting the money back. You will only be reporting the earnings on the distribution.

[starfisht]

"You'll get a 2022 Form 1099-R to report the overcontribution refunded to you, but since you have already added it to your 2021 income (either by Corrected W-2 or 'Other Income'), only the Earnings will be taxable for 2022."

Two things confuse me:

1) I'm getting the overcontribution refunded to me in 2022 but paying the tax, either by corrected W-2 or 'Other Income', on my 2021 tax return. So even though I receive the overcontribution in 2022 it's considered 2021 income, correct? 

2) The 2022 1099-R reports income (the overcontribution) as 2022 income, right? Can the 1099-R simply be ignored?