401K Over Contribution - Distributed Earnings on Form 1099-R

Forum|Forum|2 years ago
March 3, 2024
2 replies
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Hi Sir or Madam,

I over contributed to my 401K account in 2023. Understood that I will get the amount withdraw plus earnings from the financial company asap. I will include the distributed amount in my 2023 return so I won't need to amend later. Question is the 1099R receives in Jan 2025 (for earnings distributed, Code 8), besides the regular taxes, any penalty will incur? Can I pay taxes in advance to cover any extra will incur when I do tax 2024 return ?

Please kindly advise.

Thank you!!

Best answer by DanaB27

No, the earnings on a 401(k) excess deferral for 2023 will be reported on your 2024 tax return. You will enter the 2024 Form 1099-R with code 8 on your 2024 tax return and it will be added to line 1h. There will be no penalty.

Please follow the steps below to enter the excess deferral on your 2023 return:

Click "Federal Taxes" on the top and select "Wages & Income"
Click "I'll choose what to work on"
Scroll down "Less common income" and click "Start" next to "Miscellaneous Income, 1099-A, 1099-C"
Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
On the "Any Other Earned Income" screen enter "2023 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

If you receive the distribution of the excess deferral and earnings by April 15th then please note for the Tax Year 2024 tax filing due April 15, 2025:

Two 2024 Forms 1099-R will be issued reporting the excess.

Form 1099-R with Code P in box 7 can be ignored if you reported the excess as described above in 2023.
However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2024.

Please be aware, if you do not take out the excess 401(k) amount by April 15th, then you are taxed twice on the excess deferral left in the plan. This happens once when you contribute it and again when you receive it as a distribution. You can't include the excess amount in the cost of the contract even though you included it in your income.

Please see Pub 525 additional information.

fanfare

Employee

return of excess contribution:

before tax filing date including extension: positive earnings allocable to the excess are taxable on the Line 4b for the year of the contribution. negative earnings are ignored; in which case, for purposes of basis, consider the original requested amount as returned.

You must have a) filed by tax day, or b) requested an extension of time to file by tax day to take advantage of the Oct 15 deadline.

positive earnings removed are no longer penalized 10% when you are under age 59 1/2. (eliminated in 2023)

@MNYL

MNYLAuthor

Thank you! Just want to confirm the 401K over contribution earnings distributed (which I should receive before 4/15/24), I will include the amount on tax return 2023, 1040 Line 4b, (IRA taxable amount)? However, this is the 401K distribution for over contribution, still report on this same line? Please clarify. Thank you!

DanaB27Answer

Please follow the steps below to enter the excess deferral on your 2023 return:

Click "Federal Taxes" on the top and select "Wages & Income"
Click "I'll choose what to work on"
Scroll down "Less common income" and click "Start" next to "Miscellaneous Income, 1099-A, 1099-C"
Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
On the "Any Other Earned Income" screen enter "2023 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

If you receive the distribution of the excess deferral and earnings by April 15th then please note for the Tax Year 2024 tax filing due April 15, 2025:

Two 2024 Forms 1099-R will be issued reporting the excess.

Form 1099-R with Code P in box 7 can be ignored if you reported the excess as described above in 2023.
However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2024.

Please see Pub 525 additional information.

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MNYLAuthor

Thank you so much DanaB27 for confirming there won't be any penalty fee for reporting the distributed earnings when report on tax return 2024 next year. I will be waiting for the distribution of the excess contribution and earnings before I file tax for 2023. Will seek advice again if I come across any issue. Many thanks for the assistance!