contributed too much into solo 401K roth

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contributed too much into solo 401K roth

Postby berkshire » Fri Apr 05, 2013 8:48 am

I opened a solo 401K in 2012; set up as a Roth for employee deferrals. I filed my 2012 taxes a few days and have realized that I deferred too much into my 401K account based on my income this year. I contributed $18,000 in employee deferral and $1,000 into the employer contribution. Ending balance 12/31/12 for the Roth employee deferral was $18,126 for a gain of $126. The maximum I could put into the employee deferral based on net income was $16,016.

Can anyone advise on what steps to take to correct this error?

And can someone clarify for me: when you have a solo 401K roth that has assets less than $250K you don't need to do anything on income tax return for the employee deferral contributions..is that correct? If you also make employer contributions into the 401K, which is not a Roth, then you do record that on your tax return as a business expense for 'retirement plan since it's tax deductable. Is my understanding correct? Thanks so much!

:oops:
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Re: contributed too much into solo 401K roth

Postby berkshire » Sun Apr 07, 2013 7:59 pm

Does anyone have any insight into contributing too much into a solo 401K and the steps to take, as well as the question about the employer contribution and tax deduction? Would really appreciate any help. thanks.
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Re: contributed too much into solo 401K roth

Postby tyler_cracker » Sun Apr 07, 2013 8:24 pm

this question is not uncommon. the keyword you're looking for is excess deferrals. check out the instructions for form 1099-r and search the forums.
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Re: contributed too much into solo 401K roth

Postby mah001 » Sun Apr 07, 2013 8:47 pm

Since making too large a contribution could result from exceeding one or more of several rules with possibly different rules regarding the correction method, how about a bit more information? It seems like you're probably referring to the 415c annual addition limit, which equals the smaller of 100 percent of pay or
$50k or so. Are you at least aged 50 by 12/31/13? 100 percent of pay for a sole proprietor using your numbers equals 16,016 plus employer portion of s.e. tax plus the 1,000 employer contribution.

By the way, the 12 month period for counting annual additions, aka the limitation year, isn't necessarily the calendar year.
chances are good your plan says it's the calendar year.
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Re: contributed too much into solo 401K roth

Postby berkshire » Sun Apr 07, 2013 9:00 pm

I am 61. $18K was contributed into the Roth employee deferral, and $1000 into the employee contribution. My net income after business expenses ended up being less than I had thought it would be when I contributed the $18K to the Roth. I did talk to a rep at Vanguard and was directed to the form at Vanguard to make the correction. Just wondered if there was any other way to deal with this problem. And wanted to make sure that the $1000 contributed to the employer portion of the solo 401K is deductible for 2012.
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Re: contributed too much into solo 401K roth

Postby mah001 » Sun Apr 07, 2013 10:03 pm

How much was net income after expenses, not including s.e. tax or the $1000 or the 16016?

The 250K refers to when you file an INFORMATION return form 5500 ez.

Your tax presentation is correct.
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Re: contributed too much into solo 401K roth

Postby berkshire » Mon Apr 08, 2013 7:26 pm

mah001 wrote:How much was net income after expenses, not including s.e. tax or the $1000 or the 16016?

The 250K refers to when you file an INFORMATION return form 5500 ez.

Your tax presentation is correct.


My net income was $17,486. So either my income would need to be higher or my total contribution to the employee deferral part of my solo 401K would need to not exceed $16,261 based on net income of $17,486. I had not used the actual formula in calculating my contribution; I had thought I could contribute an amount that equaled my net income. And had thought net income would be at least $18K so I made contributions throughout the year, up to the total $18K that went into the 401.
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Re: contributed too much into solo 401K roth

Postby mah001 » Mon Apr 08, 2013 8:39 pm

That looks like an excess annual addition. I come up with an excess of $2,852 plus earnings on same, after a few assumptions----
Somehow you can say the first $1,000 removed is the deductible 'employer' contribution. Then you'd need $1,852 more from the Roth deferrals, plus earnings on both of the preceding. The earnings is taxable income for the year 2013.

Calculation based on $17,486 net income from self employment, less .0765 EMPLOYER share of 2012 SE tax ($1338.)=$16,148. No need to subtract the $1,000 if can distribute it.

See Rev. Proc. 2013-12 table of Contents for how to self correct a section 415(c) excess. They might say you have to take employee deferrals first, in which case the 415 limit on annual additions is $17,486 less 1338 less 1,000, or $15,148. In this latter scenario you still keep the 1,000 deductible part, but you remove 1,000 more than when using plan 1, plus earnings.

There's also a rule not often used, 'mistake of fact,' which lets you take money out of a plan once it's in the plan. Overestimating earnings can be a mistake of fact. Can't remember the time frame during which you must remove the funds. Check your full plan document.

I don't see calling the situation 'excess deferral' because you're ok there after including catchup allo
wance. Similarly it's not an excess contributionl, which refers to the nondiscrimination test. So you should not refer to guidance regarding those types of excesses.
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Re: contributed too much into solo 401K roth

Postby berkshire » Tue Apr 09, 2013 7:55 pm

Thank you so much for your clarification. I realize after reading your posts that I really didn't understand some of the basics of my solo 401K. When I spoke to the Vanguard rep about this issue he stated the issue was 'excessive deferral'. However, I didn't mention my age and he didn't ask so I guess the assumption was 'excessive deferral' rather than 'excess annual addition'.

One more question...do I need to file an amended income tax return once I do the paperwork for Vanguard to correct the excess contribution?

I really appreciate the information you've provided for me.
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