Leaving in 401k excessive contributions.

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Leaving in 401k excessive contributions.

Postby moolman » Fri Feb 08, 2013 1:38 am

Been doing google searches and I just wanted to confirm what to do.

I over contributed by $415 to my 401k because of 2 employers. The 2nd employerer was not suppose to add anything but there was a misunderstanding when I setup benefits for 2013, they started the 401k changes in the last month of 2012, resulting in the excess $415.

It's way more of a hassle to take the overcontribution out so I'll just keep it in there.

Is this the correct way to handle this. On my W-2, I will add the $415 overcontribution to BOX 1 of the W-2. This will mean I am paying taxes on it. I will leave the $415 in Box 12a. Right now it's Marked as D which means 401k contribution in Box 12a.

Of course this means that I will be paying taxes on the amount now and when I withdraw the amount in retirement again. I understand that. Is there anything else I need to be doing, like filling out a special IRS form?

On a side note, the extra taxes according to turbotax will be about $155. about 40% with CA tax and federal.
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Re: Leaving in 401k excessive contributions.

Postby umfundi » Fri Feb 08, 2013 4:15 am

I don't see why it's a big hassle for them to correct it. Call each of the plans to understand what can be after-tax or excess contributions.

In any event, one of your 401k plans should be able to tag the amount as an after tax contribution so it will not be taxed on the way out. They keep track of that.

In an IRA, excess contributions are not benign. The IRS will assess a 10% penalty each year they remain there.

Your W2 amounts are reported to the IRS. If you put different amounts on your return you are looking for trouble. You will get umpteen robot generated letters that will be impossible to resolve because you cannot reach a real person.

If you cannot easily fix the issue with your employers, my recommendation is to simply put the W2 amounts on your return. If the IRS catches it, they will tell you how to fix it.

Keith
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Re: Leaving in 401k excessive contributions.

Postby livesoft » Fri Feb 08, 2013 7:35 am

My spouse also overcontributed because of 2 employers. It was way too easy and hassle-free to correct it. It seems the 401(k) provider knows this kind of thing happens all the time. All it took to correct it was an e-mail.

So have you asked your provider of Dec 2012 to give you a "corrective distribution"?

I think there is some mis-information in umfundi's response. As I understand it, there a not a 10% penalty for an IRA excess contribution that remains. There is a 6% excise tax.

One will not get in trouble with the IRS if one puts in an amount larger than on their W-2 on line 7, Form 1040. That's where the corrective distribution will get added (but not for 2012, instead for 2013 taxes, but check the rules). One will get a 1099R for the corrective distribution with the proper code. Tax software will know what to do with it.

Once again, this stuff is easy to fix.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Leaving in 401k excessive contributions.

Postby umfundi » Fri Feb 08, 2013 9:30 am

livesoft wrote:
I think there is some mis-information in umfundi's response. As I understand it, there a not a 10% penalty for an IRA excess contribution that remains. There is a 6% excise tax.


Thank you for that correction.

Keith
Last edited by umfundi on Sat Feb 09, 2013 5:27 am, edited 1 time in total.
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Re: Leaving in 401k excessive contributions.

Postby Alan S. » Fri Feb 08, 2013 1:33 pm

You have an excess deferral here, not an excess contribution, and they are handled differently.

For an excess deferral that one of the employers returns by 4/15 with allocated earnings, you would add the amount of the excess to your wages for 2012, line 7 of Form 1040. Any earnings however would be added to your wages on your 2013 return. There is no 10% penalty (or 6% penalty), and you cannot roll over the distribution to an IRA.

If you opt to leave the $415 in the plan, you still must add it to line 7 of your 2012 return. The earnings stay in the plan along with the excess. Eventually, the $415 will be taxed again when you eventually distribute it in retirement or from your rollover IRA as RMDs. Therefore, the worst thing you can do is to remove it soon after 4/15. as it would then be taxed in both 2012 and 2013. The better your earnings, the more likely you might be to leave the excess deferral in the plan. If you have a loss on the excess and receive the net distribution by 4/15, you can deduct the loss on line 21 of Form 1040 in the year the excess is distributed to you.

There are no additional forms needed to report the excess, whether you request the distribution or not. The appropriate amounts just get added to line 7 of Form 1040 for the applicable year. If you remove the excess, you will not get the 1099R until Jan, 2014. If you don't, there is no 1099R, but the IRS will expect to see the additional amount on line 7 because your Code D amounts on both your W-2 forms will exceed the 17,000 limit for 2012.
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Re: Leaving in 401k excessive contributions.

Postby livesoft » Fri Feb 08, 2013 10:28 pm

Thanks Alan for correcting my mis-information. I re-read IRS Publication 525 pp. 9-11 where some of this is discussed. It is interesting that there are excess elective deferrals, excess contributions, and excess annual additions ... which are all different things.

Because of some shenanigans of my spouse's employers, we have excess contributions to Roth IRAs, an excess elective deferral to a 401(k) plan, an indirect rollover to an IRA, and a direct rollover to an IRA and a fistful of 1099-Rs.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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