401k over contribution

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Topic Author
natures
Posts: 19
Joined: Sun Jan 16, 2022 2:03 pm

401k over contribution

Post by natures »

Hi everyone,

Due to job change in 2021, I ended up over contributing to my employer sponsored pre-tax 401k by ~ $600.

This is how I plan on fixing it: enter the details from all the W2 in my tax software and when it mentions that I over contributed to 401K, I will pay the tax for this extra amount (miscellaneous income?) and keep it simple. If I follow this plan, will there be any fine or penalty in the future. I am not concerned about paying taxes twice on the ~$600.

Couple of more questions:

Am I obligated to communicate this to my current employer so they can claw back the match for the excess contribution?

Will there be any issues in the future if I end up leaving this employer and moving this money to a rollover IRA? In particular, I am worried about the 6% penalty for over contribution to an IRA plan. Will the penalty apply for rollover IRA money where the excess contribution was done a while ago?

If it matters, my spouse and I file taxes jointly and she contributed some money to her own 401k as well.

Thanks to this great forum, I am learning a lot! I appreciate your efforts and looking forward for the inputs.
Topic Author
natures
Posts: 19
Joined: Sun Jan 16, 2022 2:03 pm

Re: 401k over contribution

Post by natures »

Bumping this so I can get some help.

Thanks so much.
GaRPH
Posts: 24
Joined: Mon Sep 03, 2018 5:35 pm

Re: 401k over contribution

Post by GaRPH »

Im also interested in what you find out, I did the same thing
TropikThunder
Posts: 3918
Joined: Sun Apr 03, 2016 5:41 pm

Re: 401k over contribution

Post by TropikThunder »

natures wrote: Sun Jan 16, 2022 2:19 pm Hi everyone,

Due to job change in 2021, I ended up over contributing to my employer sponsored pre-tax 401k by ~ $600.

This is how I plan on fixing it: enter the details from all the W2 in my tax software and when it mentions that I over contributed to 401K, I will pay the tax for this extra amount (miscellaneous income?) and keep it simple. If I follow this plan, will there be any fine or penalty in the future. I am not concerned about paying taxes twice on the ~$600.

Couple of more questions:

Am I obligated to communicate this to my current employer so they can claw back the match for the excess contribution?

Will there be any issues in the future if I end up leaving this employer and moving this money to a rollover IRA? In particular, I am worried about the 6% penalty for over contribution to an IRA plan. Will the penalty apply for rollover IRA money where the excess contribution was done a while ago?

If it matters, my spouse and I file taxes jointly and she contributed some money to her own 401k as well.

Thanks to this great forum, I am learning a lot! I appreciate your efforts and looking forward for the inputs.
1. No fines, no penalties. There is a 6% penalty for over contributions to an IRA but no corresponding penalty involving a 401k. No contribution limits or penalties apply to money moved into an IRA by rollover, they only apply for the original contribution.

2. No obligation to inform either employer or custodian. You will not have exceeded the statutory limit for employee elective deferrals at either custodian/employer individually, only in aggregate. Therefor neither plan is in violation and neither plan needs to do anything.

3. Your plan to deal with it is appropriate. You will not be allowed to deduct the $600 overage (tax software will handle it) so it will be after tax on the way in. Since there is no way to segregate non-deductible contributions into a pre-tax 401k, that money (and it’s earnings) will also be taxable on withdrawal but I think you’ve already accepted that.

Depending on the particulars, it’s possible you received more employee match then you would have without going over, which often more than makes up for the extra tax. So it’s not a big deal IMO.
Topic Author
natures
Posts: 19
Joined: Sun Jan 16, 2022 2:03 pm

Re: 401k over contribution

Post by natures »

Thanks a lot TropikThunder, your inputs are very helpful.
Topic Author
natures
Posts: 19
Joined: Sun Jan 16, 2022 2:03 pm

Re: 401k over contribution - update

Post by natures »

Hi all,

Wanted to provide an update on my situation and hope this is of help to others.

After all doing taxes with excess contribution is not as easy as I thought (at least not in taxact software)!.

After I inputted my W2 info, the software did not automatically identify that I over contributed to 401K, so I had to create a 1099-R and had to call my benefits provider/custodian to obtain their name, EIN and address.

In box1 and box2a of the new 1099-R that I created, I had to put the excess contribution amount and in box7 I provided code 8. This will make sure that I am proactively paying tax now and when the custodian issues a 1099-R next year they will have the code P in box 7 (I can ignore this 1099-R).

If someone knows a better way to do this, please let me know.

Thanks.
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