Over Contribution to 401k

Forum|Forum|4 years ago
March 31, 2022
1 reply
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Hello,

Do to switching jobs i ended up overcontributing to my 401k by about $150 dollars above the IRS limit. I talked to my plan administrator they will not issue a refund after March 1st.

What is the correct way to address this on my tax return?

Best answer by macuser_22

@kberry7211 wrote:

March 1st of this year, so it has already passed.

So i overcontributed in 2021, cant get a a refund on the excess deferral, and am not sure what to do about it on my 2021 tax return.

Thanks

The tax law says it must be refunded before April 15, of the year following the excess, not March 1.

However, for a job switch involving two employers then neither employer is required to return the excess but most will.

If they do not then the excess can remain in the plan but it still taxable income to you in 2021 and will be taxed again when you finally remove it (after retirement). That double tax is the penalty for not removing it. In the mean time the excess will continue to grow in the account so that might actually turn out to be an advantage.

For information see IRS Pub 525 page 10
https://www.irs.gov/pub/irs-pdf/p525.pdf

Excess 401(k) deferrals should be reported in:
(There are several screens to click through to get to the right place)

Miscellionious Income ->
Other Income not reported on a W-2 ->
Other wages (yes) ->
House Hold employee (Continue) ->
Sick Pay (Continue) ->
Other earned income (yes) (Includes excess salary deferrals)->
Source of income (other) ->
Any other income - enter the amount of the excess deferral and an explanation.

This will add the excess to your 2021 wages on line 1 of the 1040 form.

DaveF1006

Level 15

To clarify, March 1 of this year or next? March 1 of this year has already passed.

@kberry7211

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kberry7211Author

Level 2

March 1st of this year, so it has already passed.

So i overcontributed in 2021, cant get a a refund on the excess deferral, and am not sure what to do about it on my 2021 tax return.

Thanks

angel888

Level 3

@angel888 wrote:

@macuser_22 @kberry7211

What would be happened if I don't withdraw the over contributions?

If you don't or can't remove the excess, Turbotax will add the excess back to your taxable income and you will pay income tax on it. This does not create a taxable basis in your 401(k), so you will pay tax on the same money again when you withdraw it in retirement (double taxation). For $150 excess contribution, that's not so bad, but it it's the principle that counts.

The tax law deadline for removing the excess is definitely April 15 (or April 18 this year due to the weekend and an official Washington DC holiday. Whether a plan administrator is legally allowed to set an earlier date is something I can't opine on. But when the excess is left in the account for whatever reason, that's what happens.

@Opus 17 @macuser_22

oh, thank you very much for taking the time helping me clarifying these! Now I see why different people from Fidelity told me different things -- I wish Fidelity retirement plan support can get some solid training so they don't mislead client (I originally overcontributed because Fidelity told me in 2020 [when I changed to 2nd job], that since both my 401Ks from the 2 companies were with Fidelity, so it would "automatically" go backdoor to post-tax contribution; apparently it did not. Then different follow up calls from 2020 to 2021 to 2022, I never got the same answer from 2 different people)

Please correct me if I understand these wrong, and with additional questions:

1.) tax official deadline is always April 15th, despite what adjustment may be made that year (e.g., COVID, Easter Friday, weekend)

2.) deadline to withdraw an over contributed 401K can depend on an earlier date by the retirement plan

3.) it seems that my employer and Fidelity can not help me withdraw the overcontributed 401k amount, so this would stay in my 401k

4.) In my tax return for 2020, TurboTax did show a box saying that I had exceeded the contribution limit

Question: I guess TurboTax did not tax me for that amount (~$5k)?!

5.) I will do the amendment for 2020, by following the instruction @macuser_22 provided, to report "Any other income" under "Miscellionious Income" (by going through steps), that will be added as my 2020 income then I will be taxed for the additional income of ~$5k

6.) when I withdraw my 401k, there are 2 scenarios:

a.) withdraw the exceeded amount of ~$5k, say, in 2022 (if I can find someone to help withdraw it)(I already filed my 2022 return by April 18 deadline this year), then I will have to amend my 2022 return --> repeat Item (5) above.

Question: what if that $5k now is only $4k? Would Fidelity calculate it for me? or IRS does not count the loss but the original exceeded contribution amount?

Question: one guy from Fidelity told me (in 2021, after tax deadline), that I will be taxed EVERY YEAR until I take out the exceeded contribution. What does it mean? But Fidelity is not helping me to withdraw it nor my employer for over 1 year now.

b.) withdraw the exceed amount of ~$5k after age of 59.5 years old. Then I will be taxed the 2nd time.

Questions:

i.) any amendment I should do, in addition to the 2020 amendment (the year I over contributed)? at the year I first withdraw?

ii.) if the original $5k grows into $10k, the 2nd time to tax an overfunded 401k will be based on $5k or $10k?

iii.) what if I roll over 2020 employer's 401k to a traditional IRA, would it affect the process/actions to be taken?