Excess 401K ROTH contribution

Forum|Forum|4 years ago
March 28, 2022
1 reply
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Hello,

I changed employers in 2021 and overcontributed to my Fidelity ROTH 401K by $3000. I found this recently while preparing my tax returns. Company says it is too late to write a check returning the amount. What are my next steps?

1. Fill the ROE form from Fidelity (https://workplaceservices.fidelity.com/bin-public/070_NB_PreLogin_Pages/documents/ReturnofExcessContributions_598550.pdf)

2. How do I estimate interest accrued on the excess contribution and do I need to show that?

3. How do I modify my return to account for this?

Appreciate any help I can get.

Thanks,

Shringi

TurboTax Premier Online

DanaB27

Usually, the plan administrator has time until April 15th to make corrective distributions.

If you withdraw it in time you will not have to add the excess to your 2021 wages since it was after-tax money. The earnings will have to be included on your 2022 return.

2022 Forms 1099-R will be issued reporting the excess:

Form 1099-R with code P in box 7 can be ignored if you withdraw it before or on April 15, 2022, since you don’t add this amount to your wages.
The earnings on Form 1099-R with Code 8 in box 7 should be reported in 2022.

Please see Pub 525 for additional information.

[Edited 3/28/2022 | 3:30pm PST]

@Sam726

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Sam726Author

Thank you.

Do I need to reduce my 401K contributions next year to adjust for this excess contribution?

It seems from your reply that I have nothing more to do except report 1099-R in next years returns (?)

Thanks.

dmertz

Employee

From Treasury Decision 9324 IRS 2007-22 I.R.B. 1302:

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.

What this says is that if you fail to obtain a distribution of this excess by April 15, 2022, the excess becomes pre-tax money in the Roth 401(k), taxable upon distribution (whether or not the distribution would otherwise be a qualified distribution). No matter when you take them, the first distributions that you take from the Roth 401(k) will be taxable distributions of this excess (and earnings attributable to the excess) until all of the excess and attributable earnings have been distributed. Because the attributable earnings must be distributed, failing to make the correction timely would create a real accounting mess. It's doubtful that the plan would be of any help in tracking the excess and the attributable earning, unless by notifying the plan they segregate the excess and attributable earnings into a separate subaccount.

Also see CFR 1.402A-1 Q&A-2(c): https://www.law.cornell.edu/cfr/text/26/1.402A-1

No, there is no provision in the tax code to treat the excess as part of a subsequent year's contribution.