Question

Individual 401k excess deferral

Forum|Forum|3 years ago
May 2, 2023
1 reply
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An excess deferral of approx. $1000 as an employee was made to my individual 401k for 2022. I will be reporting the excess deferral as income on my 2022 return as ‘other earned income’. Is it correct I’m not required to remove the excess contribution from my 401k account at this time (e.g., as an early distribution)?

D

dmertz

Employee

Failure to correct the error generally subjects the plan to disqualification:

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-elective-deferrals-werent-limited-to-the-amounts-under-irc-section-402g-for-the-calendar-year-and-excesses-werent-distributed

Did you make elective deferrals to the individual 401(k) plan in excess of your net earnings (more than the deductible amount) or was the error due to making elective deferrals or Roth contributions to another employer's plan and the combined total exceeds the limit? If you contributed more than the deductible amount, it doesn't make sense to include the excess as other income because the excess was never excluded from income.

R

rwtmia Author

The excess was due to not accounting for the self-employment tax on the net earnings.
Vanguard advised to have a CPA coordinate the correction due to the complexity of the process.

Thank you for your reply.

D

dmertz

Employee

In that case, as described in the reference I provided the corrective distribution must be made to avoid the plan being subject to disqualification Preventing an excess contribution was entirely your responsibility.

Vanguard should be more helpful in calculating the amount to distribute to account for any investment gain or loss attributable to the excess contribution being distributed since they will have the account balances on the date of the contribution and the date of the distribution needed to do the calculation.