Over Contribution to 401k

[kberry7211]

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?

[DaveF1006]

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

@kberry7211

[kberry7211]

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

[macuser_22 · Accepted solution]

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@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

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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.

[angel888]

@macuser_22 @kberry7211 

Tax deadline (normally is April 15) is different from withdrawing the over contributed 401k (March 1st).  I checked a few times last year 2021 since I had the same situation (2 jobs, over contribution in 2020).  The 1st person I got from Fidelity told me to do it by tax deadline.  When I did it before the tax deadline but after March 1st, another 2 people in Fidelity told me that I missed the deadline.

Fidelity kept telling me different things, so I am bounced in between my 2020 employer and Fidelity.  Fidelity told me that only employer can take out my overcontributed money, but then my employer told me only Fidelity can do so.  So now in 2022 after 2021 tax deadline, I still couldn't do anything nor know what to do.

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

[macuser_22]

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@angel888 wrote:

@macuser_22 @kberry7211 

Tax deadline (normally is April 15) is different from withdrawing the over contributed 401k (March 1st).  I checked a few times last year 2021 since I had the same situation (2 jobs, over contribution in 2020).  The 1st person I got from Fidelity told me to do it by tax deadline.  When I did it before the tax deadline but after March 1st, another 2 people in Fidelity told me that I missed the deadline.

Fidelity kept telling me different things, so I am bounced in between my 2020 employer and Fidelity.  Fidelity told me that only employer can take out my overcontributed money, but then my employer told me only Fidelity can do so.  So now in 2022 after 2021 tax deadline, I still couldn't do anything nor know what to do.

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

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Is is not "normally Apr 15", it is defined in tax law as April 15 of the year following the year of the excess deferral and the law has not changed in many years.

If the April 15 date is missed then you just leave the excess in the account and pay the tax on it for the year of the excess as follows.

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 returned excess to your wages on line 1 of the 1040 form

[Opus 17]

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@angel888 wrote:

@macuser_22 @kberry7211 

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

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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. 

[macuser_22]

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@Opus 17 wrote:

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@angel888 wrote:

@macuser_22 @kberry7211 

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

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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. 

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It is not April 18 or tied to the tax due date at all.  It is April 15 or earlier it the plan specifies an earlier date.

Here is the tax code that says that.

26 CFR § 1.402(g)-1(e)(2)(ii) Not later than the first April 15 following the close of the taxable year, the plan may distribute to the individual the amount designated under paragraph (e)(2)(i) of this section (and any income allocable to that amount).

[angel888]

@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?

[macuser_22]

The excess just becomes part of the 401(k) and is not separate.   Nothing else to do.    When you retiree and start taking attributions then any distribution will be taxable income.  

[angel888]

@macuser_22 

oh, do I still need to do amendment for 2020, the year when I over contributed 401k? 

Then I just wait till the retirement age (the earliest 59.5 years old) to withdraw 401k as regular people do (whose 401k always not exceeds the contribution limit), that every dollar will be taxed.

[macuser_22]

Yes you must amend 2020, if that was the year of the excess, to report the excess as I described in a previous post.    After that just forget it - you are done.

[angel888]

@macuser_22 

oh my goodness, that makes my life so much easy!!  I don't have to keep calling Fidelity every quarter now nor worry about anything any more.  I will do the amendment for 2020 when I over contributed.  Then it is all done!!  THANK YOU SO MUCH!!

[davoti2]

I am reading your discussion thread and thanks for the information.

A quick question, Amendment is NOT a separate tax filing but just state the excessive 401k contributing part in "other income section" on the same 1040 form, correct?

many thanks.

Dave

[DanaB27]

An amendment (Form 1040-X) is only necessary if you did include the 2022 excess 401(k) contribution on your 2022 filed return.

 If you received the distribution of a 2022 excess deferral plus earnings in 2023, then you will receive two 2023 Forms 1099-R in 2024.

The first 2023 Form 1099-R will have a code P but it will have to be included on your 2022 tax return. You have two options if you haven't filed your 2022 return: 

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 return with the steps below and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or  Box 14 State withholding. Then you must enter the 2023 Form 1099-R into the 2023 tax return since the withholding is reported in the year that the tax was withheld. The 2023 code P will not do anything in the 2023 tax return but the tax withholdings will be applied to 2023.

The second 2023 Form 1099-R for the earnings with Code 8 in box 7 should be reported in 2023.

Please follow these steps to report a 2022 excess 401(k) deferral:

1. Login to your TurboTax Account 
2. Click "Federal" from 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 "2022 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

@davoti2