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Excess contributions in IRA

Forum|Forum|4 years ago
March 9, 2022
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Hi

The TurboTax tool is showing that I and my wife have excess contributions in 2021 for both of our 401K and Roth IRA accounts. Is there a way to roll over the excess contributions as contributions to 2022 instead of withdrawing and paying a penalty?

Alternately, if the excess contribution is used for a college expenses for my child , is the 6% penalty applicable?

thanks

Arun

Best answer by MAK70

Unfortunately, for the 401(k) unless a corrected distribution is made, excess deferrals are (1) included in a participant’s taxable income for the year contributed, and (2) taxed a second time when the deferrals are ultimately distributed from the plan. A participant who fails to receive a distribution of the excess deferrals does not receive basis in his pre-tax deferral account equal to the amount of excess deferrals.

For the IRA, if you use the carry forward method to add the excess to the following year's contribution. You will be subject to the 6% excise tax because you did not correct the excess by the deadline, but you will not owe tax and, if you are under 59½, the 10% additional tax on any earnings.

NOTE: You will not be able to recharacterize the carry forward amount to the other type of IRA. For example, if the carry forward amount is in a Traditional IRA, you cannot recharacterize that amount as a Roth IRA contribution.

The IRA early withdrawals that are used to pay for qualified higher-education expenses on behalf of you, your spouse, or the children or grandchildren of you or your spouse are exempt from the 10% tax penalty, but note the only income/penalty you pay if you make the corrective distribution is on the earnings while it was in the account. You may want to contact your plan administrator and find out the amount because realistically it is additional income you would not have had but for the excess contribution.

M

MAK70Answer

Unfortunately, for the 401(k) unless a corrected distribution is made, excess deferrals are (1) included in a participant’s taxable income for the year contributed, and (2) taxed a second time when the deferrals are ultimately distributed from the plan. A participant who fails to receive a distribution of the excess deferrals does not receive basis in his pre-tax deferral account equal to the amount of excess deferrals.

For the IRA, if you use the carry forward method to add the excess to the following year's contribution. You will be subject to the 6% excise tax because you did not correct the excess by the deadline, but you will not owe tax and, if you are under 59½, the 10% additional tax on any earnings.

NOTE: You will not be able to recharacterize the carry forward amount to the other type of IRA. For example, if the carry forward amount is in a Traditional IRA, you cannot recharacterize that amount as a Roth IRA contribution.

The IRA early withdrawals that are used to pay for qualified higher-education expenses on behalf of you, your spouse, or the children or grandchildren of you or your spouse are exempt from the 10% tax penalty, but note the only income/penalty you pay if you make the corrective distribution is on the earnings while it was in the account. You may want to contact your plan administrator and find out the amount because realistically it is additional income you would not have had but for the excess contribution.