I want to pay the extra tax and penalty for 401k overcontribution

Forum|Forum|5 years ago
March 11, 2021
2 replies
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Hello, I changed jobs in mid 2020, and the match with my new company was so much better than my old company even after taxes/penalties that I decided to over contribute to my 401k. Is there a way in TurboTax that I can pay the extra taxes and the penalties and just be done with it?

MinhT1

You need to ask for the return of the excess contribution by April 15, 2021. Otherwise, you will incur an excise tax of 6% every year the excess contribution remains in your account.

Reporting excess salary deferrals (excess 401k contributions) returned to you after the end of the tax year but by April 15th of the following tax year on your 1040. Do not create your own 1099-R for this situation.

Page 10 of IRS Pub 525 under Excess deferrals (the IRS term for 401K contribution is deferral) tells us to include the excess deferrals as income on line 7 of Form 1040 if the money was returned after the end of the tax year but by April 15th of the following tax year. You need to report only the excess contribution, not any money generated by the investment of the excess contribution. What you earned will be covered by a 1099-R for the following tax year and will be entered then as a normal 1099-R.

Below is how to do this in TurboTax:

Click on Federal in the left-hand column, then on Wages & Income
Under All Income, scroll down to Less Common Income
Select Miscellaneous Income and click Start
Select Other income not already reported on a Form W-2 or Form 1099 and click on Start
Answer the question "Did you receive any other wages? Yes
Click through the questions till you get to Any Other Earned Income
Answer Yes to Did you earn any other wages?
Indicate Other as Source of Other Earned Income and click Continue
For the description enter "2020 Excess 401K Deferrals" and click on Done

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aroonsmitaAuthor

Thank you so much, I really appreciate it.

One more question please. Who do I ask for the return of excess contribution? I asked my employer and they said they would not return it as it was not their fault and they will not send an amended W-2. Would I go to my 401k plan/provider and ask them for a payout before April 15 (and would this be considered a distribution)?

Thank you

Aroon

dmertz

Employee

There is no 6% excess-contribution penalty on an excess 401(k) elective deferral. If not corrected by the deadline, the penalty is that money used to make the excess contribution is taxed twice, once on the tax return for the year in which the elective deferral was made and again when the money is distributed from the 401(k).