Help! How do I get rid of an old excess contribution in my 403(b)/401(k)?

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sarabayo
Posts: 65
Joined: Fri Jun 29, 2018 6:59 pm

Help! How do I get rid of an old excess contribution in my 403(b)/401(k)?

Post by sarabayo » Sat Nov 10, 2018 12:27 pm

I have a whole bunch of questions about an excess 403(b) and/or 401(k) contribution I made in 2016. I wasn't sure what subforum to post this in, so let me know if it'd go better in one of the other subforums.

I switched jobs in mid-2016. I had a Roth 403(b) at the job I left, and I have a mostly Roth, partly Traditional 401(k) at the job I'm at now. Unfortunately, my total elective deferrals into the 403(b) and 401(k) combined for 2016 was about $1k more than the 2016 elective deferral limit of $18,000. (This happened because my last 403(b) deferral from 2015 was actually recorded in Jan 2016, and I didn't notice until much later.) Now it's too late to have excess deferrals "canceled" and refunded to me (I had to notice the excess contribution and request it to be returned by April 2017, apparently.)

How can I fix this? I gather that I need to withdraw the excess contribution amount plus the earnings on that amount. Then, the contribution amount is taxable in the contribution year and the entire amount is taxable in the withdrawal year (including the contribution amount again, i.e. double taxation). I've searched the web and found a bunch of articles telling me how important it is to notice this kind of mistake by April of the following year to avoid double taxation, but not how to actually deal with the double taxation situation if you find yourself in it. For example, neither my 403(b) plan nor my 401(k) plan allow me to withdraw anything from them, since I'm not 59.5 years old yet (and won't be for three decades). Is there some special verbiage I have to use when talking to my plan operators, to force them to let me withdraw the amount since I'm just trying to remedy an excess contribution? Or do I really have to leave the "bad" money festering in there until I retire? :(

In the first place, of all the elective deferrals I made in 2016, which one contains the "excess"? Can I choose which one I want it to be? I.e., can I choose to withdraw from either the 403(b) or the 401(k) to remedy the excess deferral? Or do I have to choose the deferral(s) which occurred after I had already hit the annual deferral limit in 2016? In that case I would have to withdraw from the 401(k), since that's the plan I was contributing to at the end of 2016.. I guess I'd prefer to withdraw from the 403(b) if possible, since it's 100% Roth, which makes the tax calculations much easier than the 401(k), which is part Roth and part Traditional.

If I am allowed to deem the excess contribution to lie in the 403(b), maybe I could roll over the 403(b), or even partially roll over just the excess contribution + earnings, into a Roth IRA. Then I'd be able to choose to make an early withdrawal from the Roth IRA, though I'd have to pay a 10% penalty on top of the double taxation. In that case, is it more financially beneficial to me to just leave that small Roth IRA alone and forget about it until I retire?

The way I see it, since the excess contribution was made as a Roth contribution, it was already after tax, so I've paid the first tax on the contribution amount. So all I have to worry about is paying tax on the principal+earnings when I withdraw it. If I have it all invested in VTSAX, say, then if I withdraw it now and pay income tax + 10% on the current balance, then reinvest the remainder in VTSAX in a taxable account, that's like betting that the tax savings on earnings from now on (the difference between my marginal income tax rate in retirement and my long term capital gains tax rate, times the amount of capital gains) will exceed 10% of the current balance. Does that sound right?

Also, assuming I can designate the last contribution I ever made to my 403(b) as being the one with the excess deferral in it, I computed the percentage of the assets in my 403(b) equal to the amount of excess at the time that contribution was made -- it's about 5%. Since I haven't withdrawn or contributed anything to the 403(b) after that, I can compute the excess contribution + its earnings by just multiplying that same percentage times the current assets in the 403(b), right?

Also, if I understand correctly, there's some kind of 6% tax on excess contributions to IRAs. Does that not apply to excess contributions to 401(k)s and/or 403(b)s? If I roll over my excess contribution + its earnings from the 403(b) to a Roth IRA as described above, does my excess contribution then get reclassified as an excess IRA contribution and become subject to the 6% tax? :confused

I'd appreciate any advice. Also, if I have any of my facts wrong, please let me know. Thanks!

Spirit Rider
Posts: 8892
Joined: Fri Mar 02, 2007 2:39 pm

Re: Help! How do I get rid of an old excess contribution in my 403(b)/401(k)?

Post by Spirit Rider » Sat Nov 10, 2018 2:10 pm

Now that the deadline has passed, you can not withdraw the excess contribution and earnings unless it otherwise becomes distribuatble under IRC Section 401(k)(2)(B); e.g. severance from employment, death, disability, age 59 1/2, etc...

If you had exceeded the 402g limit solely with pre-tax deferrals. You would need to amend your 2016 return, report the excess contributions and earnings as income and pay ordinary income taxes and the 10% early withdrawal penalty. As Roth designated contributions, you do not need to do so because they were not pre-tax.

Since you contributed to two different plans, there is no tracking by the employers for these amounts. I doubt even the IRS is tracking these amounts. There is no specific action to take for pre-tax deferrals, because the entire balance is taxable when distributed. This is not true for Roth designated accounts. Below is the relevant IRS regulation if you want to act on it.

26 CFR 1.402(g)-1 - Limitation on exclusion for elective deferrals, (e) Treatment of excess deferrals, (8)Tax treatment -
(iv)Distributions of excess deferrals from a designated Roth account. The rules of paragraph (e)(8)(iii) of this section generally apply to distributions of excess deferrals that are designated Roth contributions and the attributable income. Thus, if a designated Roth account described in section 402A includes any excess deferrals, any distribution of amounts attributable to those excess deferrals are includible in gross income (without adjustment for any return of investment in the contract under section 72(e)(8)). In addition, such distributions cannot be qualified distributions described in section 402A(d)(2) and are not eligible rollover distributions within the meaning of section 402(c)(4). For this purpose, if a designated Roth account includes any excess deferrals, any distributions from the account are treated as attributable to those excess deferrals until the total amount distributed from the designated Roth account equals the total of such deferrals and attributable income.

anonenigma
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Joined: Thu Apr 21, 2011 11:58 pm

Re: Help! How do I get rid of an old excess contribution in my 403(b)/401(k)?

Post by anonenigma » Sat Nov 10, 2018 2:28 pm

I doubt that the 2016 posting date matters if the deferral was for a 2015 payroll.

Spirit Rider
Posts: 8892
Joined: Fri Mar 02, 2007 2:39 pm

Re: Help! How do I get rid of an old excess contribution in my 403(b)/401(k)?

Post by Spirit Rider » Sat Nov 10, 2018 3:51 pm

anonenigma wrote:
Sat Nov 10, 2018 2:28 pm
I doubt that the 2016 posting date matters if the deferral was for a 2015 payroll.
You bring up a good point, but the deposit date to the 401k account does not matter.

However, what does matter is what the "pay date" and not the pay period date. Individual taxpayers are always "cash" basis tax payers. What this means is that it is not for what year the income is for, but what year the income is received. If the pay period ending date is close to the end of one year and your pay date is the following week in the following year, the 401k contribution is considered for that year.

OP, the easiest way to determine this is to check your W-2 Box 12 codes. If the sum of all employers exceeds that year's limit, you have an excess contribution. If not, you do not.

Jon H
Posts: 108
Joined: Sun Jan 21, 2018 2:50 pm

Re: Help! How do I get rid of an old excess contribution in my 403(b)/401(k)?

Post by Jon H » Sat Nov 10, 2018 4:19 pm

Consider gain and loss, but never be greedy and everything will be alright (fortune cookie)

Spirit Rider
Posts: 8892
Joined: Fri Mar 02, 2007 2:39 pm

Re: Help! How do I get rid of an old excess contribution in my 403(b)/401(k)?

Post by Spirit Rider » Sat Nov 10, 2018 4:44 pm

Jon H wrote:
Sat Nov 10, 2018 4:19 pm
https://www.irs.gov/pub/irs-pdf/f5329.pdf
Form 5329 has nothing to do with qualified plans and even Form 5330 does not apply in these circumstances.

Jon H
Posts: 108
Joined: Sun Jan 21, 2018 2:50 pm

Re: Help! How do I get rid of an old excess contribution in my 403(b)/401(k)?

Post by Jon H » Sat Nov 10, 2018 5:50 pm

Sorry I misunderstood.

Try searching irs.gov for “Guide - Elective deferrals weren't limited to the amounts under IRC Section 402(g) for the calendar year and excesses weren't distributed”
Consider gain and loss, but never be greedy and everything will be alright (fortune cookie)

sarabayo
Posts: 65
Joined: Fri Jun 29, 2018 6:59 pm

Re: Help! How do I get rid of an old excess contribution in my 403(b)/401(k)?

Post by sarabayo » Sat Nov 10, 2018 7:12 pm

Spirit Rider wrote:
Sat Nov 10, 2018 2:10 pm
Now that the deadline has passed, you can not withdraw the excess contribution and earnings unless it otherwise becomes distribuatble under IRC Section 401(k)(2)(B); e.g. severance from employment, death, disability, age 59 1/2, etc...
Right, but I no longer work for the employer associated with my 403(b), so doesn't that make me eligible for distribution from the 403(b)? Trying to distribute the excess from the 401(k) would be harder since I still work for that employer. But I'm still not clear on where the excess deferral is sitting. I contributed $19k in 2016 and $18k was the limit, but which $1k is the excess? Is there some rule for this? Can I just pick a particular paycheck deferral from 2016 and call that one the excessive one?
Spirit Rider wrote:
Sat Nov 10, 2018 2:10 pm
If you had exceeded the 402g limit solely with pre-tax deferrals. You would need to amend your 2016 return, report the excess contributions and earnings as income and pay ordinary income taxes and the 10% early withdrawal penalty. As Roth designated contributions, you do not need to do so because they were not pre-tax.
OK, thanks for the confirmation that I don't need to amend my 2016 return since my 2016 contributions were all Roth-designated.
Spirit Rider wrote:
Sat Nov 10, 2018 2:10 pm
Since you contributed to two different plans, there is no tracking by the employers for these amounts. I doubt even the IRS is tracking these amounts. There is no specific action to take for pre-tax deferrals, because the entire balance is taxable when distributed. This is not true for Roth designated accounts. Below is the relevant IRS regulation if you want to act on it.

26 CFR 1.402(g)-1 - Limitation on exclusion for elective deferrals, (e) Treatment of excess deferrals, (8)Tax treatment -
(iv)Distributions of excess deferrals from a designated Roth account. The rules of paragraph (e)(8)(iii) of this section generally apply to distributions of excess deferrals that are designated Roth contributions and the attributable income. Thus, if a designated Roth account described in section 402A includes any excess deferrals, any distribution of amounts attributable to those excess deferrals are includible in gross income (without adjustment for any return of investment in the contract under section 72(e)(8)). In addition, such distributions cannot be qualified distributions described in section 402A(d)(2) and are not eligible rollover distributions within the meaning of section 402(c)(4). For this purpose, if a designated Roth account includes any excess deferrals, any distributions from the account are treated as attributable to those excess deferrals until the total amount distributed from the designated Roth account equals the total of such deferrals and attributable income.
I'm not sure I fully understand your paragraph and the IRC quote, but here's my guess -- I can't roll over the excess from my 403(b) into a Roth IRA because I must take it as a taxable distribution and include the entire amount plus earnings in my gross income as soon as it leaves the 403(b). Is that right?

sarabayo
Posts: 65
Joined: Fri Jun 29, 2018 6:59 pm

Re: Help! How do I get rid of an old excess contribution in my 403(b)/401(k)?

Post by sarabayo » Sat Nov 10, 2018 7:13 pm

Spirit Rider wrote:
Sat Nov 10, 2018 3:51 pm
anonenigma wrote:
Sat Nov 10, 2018 2:28 pm
I doubt that the 2016 posting date matters if the deferral was for a 2015 payroll.
You bring up a good point, but the deposit date to the 401k account does not matter.

OP, the easiest way to determine this is to check your W-2 Box 12 codes. If the sum of all employers exceeds that year's limit, you have an excess contribution. If not, you do not.
Yes, looking at my W-2 forms from the two employers in 2016 is how I discovered the excess contribution. I have a BB box of ~$13k on the W-2 from the first employer and an AA box of ~$6k on the W-2 from the second employer.

Spirit Rider
Posts: 8892
Joined: Fri Mar 02, 2007 2:39 pm

Re: Help! How do I get rid of an old excess contribution in my 403(b)/401(k)?

Post by Spirit Rider » Sat Nov 10, 2018 8:01 pm

You are correct that you can take distributions from the 403b because you have separated from that employer, but not from a current employer. If you are not eligible for one of the early withdrawal penalty exemptions. You will pay income tax and a 10% penalty on the excess contribution and earnings

However, since the corrective distribution will be taxed from either the Roth contributions or pre-tax deferrals it would seem better to take them from the latter.

Note: There does not appear to be any time limit on when this needs to be done. I wonder if it isn't better to wait until you have a penalty-free distributable event to do this if possible from from pre-tax balances???

I wonder how many people don't even know they did this and never take any steps to resolve.

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