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Excess Contribution to both 401K and 401Roth

Forum|Forum|1 year ago
May 6, 2024
3 replies
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Here is my problem. My wife had two different employers in 2023. Both contributed $22,500 to a combination of traditional 401K and Roth 401K. We confirmed this only after we filed our taxes (turbotax did give the notice) and after April 15th, 2024.

What do we do now? As I understand it, we need to figure out how much was contributed to the traditional 401K and pay tax on that amount plus earnings on those contribution. (No idea how I would calculate that? Is there still a 6% penalty as well?). Then we can leave the traditional 401K contribution in the retirement fund. For the Roth 401K presumably we have to remove the contribution, but neither the employer nor the plan manager (Vanguard) seems willing to do that.

Any help would be much appreciated! (I can't believe this does not happen to a lot of folks).

Thanks!!!!

Not A Product Question

Best answer by dmertz

I assume that you meant to say that your wife (not the employer) contributed $22,500 for 2023 at both employers.

"As I understand it, we need to figure out how much was contributed to the traditional 401K and pay tax on that amount plus earnings on those contribution."

Only the amount of the excess traditional 401(k) contribution is to be added to 2023 AGI, not the attributable earnings.

Because it is now after April 15, 2024, distributions of the excess employee contributions would have to be done by regular distributions which are not permitted (except as hardship distributions) until age 59½ or separation from service. The excess traditional and Roth contributions and attributable earnings will be taxable when eventually distributed. This means that there will be double taxation of the $22,500 total of excess contributions to the traditional and Roth accounts and single taxation of the attributable earnings from both. If the distribution is obtained before age 59½, there will generally also be a 10% early distribution penalty on the amount distributed.

D

dmertzAnswer

Employee

I assume that you meant to say that your wife (not the employer) contributed $22,500 for 2023 at both employers.

"As I understand it, we need to figure out how much was contributed to the traditional 401K and pay tax on that amount plus earnings on those contribution."

Only the amount of the excess traditional 401(k) contribution is to be added to 2023 AGI, not the attributable earnings.

Because it is now after April 15, 2024, distributions of the excess employee contributions would have to be done by regular distributions which are not permitted (except as hardship distributions) until age 59½ or separation from service. The excess traditional and Roth contributions and attributable earnings will be taxable when eventually distributed. This means that there will be double taxation of the $22,500 total of excess contributions to the traditional and Roth accounts and single taxation of the attributable earnings from both. If the distribution is obtained before age 59½, there will generally also be a 10% early distribution penalty on the amount distributed.

O

Opus 17

Employee

@dmertz

Can you explain more with respect to the excess contributions to the designated Roth? They are already taxed, and they won't be taxed on withdrawal, so it seems there is no consequence or penalty for excess deferrals to a Roth 401k?

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dmertz

Employee

Double-taxation is effectively the penalty that you pay for the excess employee contribution whether the excess contribution is made to the traditional account or to the Roth account.

Treasury Decision 9324, Internal Revenue Service, 2007-22 I.R.B. 1302 states:

Designated Roth Contributions as Excess Deferrals

Even though designated Roth contributions are not excluded from income when contributed, they are treated as elective deferrals for purposes of section 402(g). Thus, to the extent total elective deferrals for the year exceed the section 402(g) limit for the year, the excess amount can be distributed by April 15th of the year following the year of the excess without adverse tax consequences. However, if such excess deferrals are not distributed by April 15th of the year following the year of the excess, these final regulations, like the proposed regulations, provide that any distribution attributable to an excess deferral that is a designated Roth contribution is includible in gross income (with no exclusion from income for amounts attributable to basis under section 72) and is not eligible for rollover. These regulations provide that if there are any excess deferrals that are designated Roth contributions that are not corrected prior to April 15th of the year following the excess, the first amounts distributed from the designated Roth account are treated as distributions of excess deferrals and earnings until the full amount of those excess deferrals (and attributable earnings) are distributed.

M

Mike9241

your situation raises the question as to whether or not you are covered by Tutbotax accuracy guarantee. It did not flag the excess. I tried a similar situation in desktop version and there was no flag that there was an excess so it's not that you made the error.

as stated, no guarantee, but you may want to file a claim

https://ttlc.intuit.com/turbotax-support/en-us/help-article/intuit-account-billing/submit-claim-turbotax-100-accurate-calculation-100/L88SYklBL_US_en_US

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Opus 17

Employee

I want to clarify one more thing that I noticed.

"My wife had two different employers in 2023. Both contributed $22,500 to a combination of traditional 401K and Roth 401K."

Are you saying that the total contribution plus employer match was more than $22,500, or are you saying that your wife's voluntary deferrals are more than $22,500?

The total allowable contribution to a 401k including both elective deferrals and employer match is $66,000 for 2023. If the employer contributions were more than $22,500, that's ok as long as they are not more than $66,000 combined. The $22,500 limit only applies to the elective salary deferrals (your wife's contributions).