401k Overcontribution

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kgingras
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401k Overcontribution

Post by kgingras » Wed Dec 05, 2018 12:33 pm

I over contributed to my 401k plan this year due to a job switch mid year. I have read online that the preferable solution is to get a corrective distribution for the amount before April 15th. I am having one hell of a time getting this sorted out. Between the people at my current 401k plan (Prudential) and my employer, no one seems to have any clue what to do. My assumption is that someone needs to contact my prior 401k (Wells Fargo) to see how much I contributed for 2018 so they can determine how much the amount of the corrective distribution. Rather than spend any more time talking to these people I’m thinking of just letting it go. What are the repercussions on doing that? I assume the IRS will figure this out at some point. The over contribution is only $652.

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JamesSFO
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Re: 401k Overcontribution

Post by JamesSFO » Wed Dec 05, 2018 12:39 pm

If you know the amount is $652 why not just ask for a corrective distribution from NewCo for that amount?

magicrat
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Re: 401k Overcontribution

Post by magicrat » Wed Dec 05, 2018 12:41 pm

Yes, the IRS will figure this out and you will owe back taxes and penalties.

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Tamarind
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Re: 401k Overcontribution

Post by Tamarind » Wed Dec 05, 2018 1:03 pm

It's up to you to do the math and get one or the other custodian to give you a corrective distribution. Since you directed the overcontribution, you are the person responsible.

If you've been talking to HR so far, consider going straight to the custodian. They'll be far more familiar with this kind of situation.

Spirit Rider
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Re: 401k Overcontribution

Post by Spirit Rider » Wed Dec 05, 2018 4:08 pm

magicrat wrote:
Wed Dec 05, 2018 12:41 pm
Yes, the IRS will figure this out and you will owe back taxes and penalties.
Not how it works. If you don't remove the now non-deductible contribution before 4/15 it is not removable and will be subject to double taxation.

Spirit Rider
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Re: 401k Overcontribution

Post by Spirit Rider » Wed Dec 05, 2018 4:17 pm

kgingras wrote:
Wed Dec 05, 2018 12:33 pm
Rather than spend any more time talking to these people I’m thinking of just letting it go. What are the repercussions on doing that? I assume the IRS will figure this out at some point. The over contribution is only $652.
As I already pointed, you most definitely do not want to "just let it go." You will still be liable for the taxes this year on the excess deferral. However, when you distribute it you will owe taxes a second time.

The problem you are having is that you are simply too eager. No one can help you at this point. A 401k plan needs to see that you actually have an excess deferral which won't be known until you receive your W-2s from both employers.

chemeng
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Re: 401k Overcontribution

Post by chemeng » Wed Dec 05, 2018 4:24 pm

Spirit Rider wrote:
Wed Dec 05, 2018 4:17 pm
kgingras wrote:
Wed Dec 05, 2018 12:33 pm
Rather than spend any more time talking to these people I’m thinking of just letting it go. What are the repercussions on doing that? I assume the IRS will figure this out at some point. The over contribution is only $652.
As I already pointed, you most definitely do not want to "just let it go." You will still be liable for the taxes this year on the excess deferral. However, when you distribute it you will owe taxes a second time.

The problem you are having is that you are simply too eager. No one can help you at this point. A 401k plan needs to see that you actually have an excess deferral which won't be known until you receive your W-2s from both employers.
At what point does the long term compounding on the excess deferral outweigh the double taxation? I'm also having a hard time getting my previous employer to provide a corrective distribution, and thus I've elected to leave in the excess. It seems that over time the compounding will outweigh the taxation. Is there something I've missed?

Spirit Rider
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Re: 401k Overcontribution

Post by Spirit Rider » Wed Dec 05, 2018 4:46 pm

chemeng wrote:
Wed Dec 05, 2018 4:24 pm
At what point does the long term compounding on the excess deferral outweigh the double taxation? I'm also having a hard time getting my previous employer to provide a corrective distribution, and thus I've elected to leave in the excess. It seems that over time the compounding will outweigh the taxation. Is there something I've missed?
Never.

You are effectively making a non-deductible contribution. Unless you have insufficient space in your tax-advantaged accounts for the tax inefficient portions of your Asset Allocation, you are turning earnings taxed at capital gains rates to being taxed at ordinary income tax rates.

Your previous employer is not where you made the excess deferral and very few of them will agree to return the excess you contributed somewhere else. You made the excess deferral to your current employer. They are the ones you should request return of the excess deferral and earnings after you receive your W-2s from both employers.

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Thrifty Femme
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Re: 401k Overcontribution

Post by Thrifty Femme » Wed Dec 05, 2018 6:50 pm

So what happens if you do nothing?

2cents2
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Re: 401k Overcontribution

Post by 2cents2 » Thu Dec 06, 2018 7:14 am

I’m going to ask a silly question: Has the over-contribution already occured with your new employer or are you projecting year end totals?

DH started work with a new employer mid year 2017. He had a situation that would have led to an over-contribution. He contacted his new company plan administrator as soon as he discovered the problem and the problem was fixed within 2 pay periods.

kgingras
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Re: 401k Overcontribution

Post by kgingras » Thu Dec 06, 2018 7:48 am

2cents2 wrote:
Thu Dec 06, 2018 7:14 am
I’m going to ask a silly question: Has the over-contribution already occured with your new employer or are you projecting year end totals?

DH started work with a new employer mid year 2017. He had a situation that would have led to an over-contribution. He contacted his new company plan administrator as soon as he discovered the problem and the problem was fixed within 2 pay periods.
It has already occurred as I have maxed out my limits.

2cents2
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Re: 401k Overcontribution

Post by 2cents2 » Fri Dec 07, 2018 8:28 am

Is it possible you are not talking to the right person in your new company?

DH has a different 401K provider (Fidelity). This issue wasn't something that Fidelity could correct. Fidelity looked up the name and phone number of the benefits team member plan administrator for the company and put DH in contact with that person who fixed the problem.

Do you have your last pay slip from your previous company? You should be able to find your contribution amount down to the penny and give that information to your new plan administrator so that corrective action can be taken. I am surprised that the new company didn't already ask you for that information when you on-boarded.

kgingras
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Re: 401k Overcontribution

Post by kgingras » Fri Dec 07, 2018 8:53 am

2cents2 wrote:
Fri Dec 07, 2018 8:28 am
Is it possible you are not talking to the right person in your new company?

DH has a different 401K provider (Fidelity). This issue wasn't something that Fidelity could correct. Fidelity looked up the name and phone number of the benefits team member plan administrator for the company and put DH in contact with that person who fixed the problem.

Do you have your last pay slip from your previous company? You should be able to find your contribution amount down to the penny and give that information to your new plan administrator so that corrective action can be taken. I am surprised that the new company didn't already ask you for that information when you on-boarded.
Yes that was the problem. I finally found the right person to talk to at my employer and should have this resolved soon. Once I provide them with documentation of what I contributed at my other plan, they will issue the corrective distribution.

Problem solved!

chemeng
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Re: 401k Overcontribution

Post by chemeng » Fri Dec 07, 2018 12:32 pm

Spirit Rider wrote:
Wed Dec 05, 2018 4:46 pm
chemeng wrote:
Wed Dec 05, 2018 4:24 pm
At what point does the long term compounding on the excess deferral outweigh the double taxation? I'm also having a hard time getting my previous employer to provide a corrective distribution, and thus I've elected to leave in the excess. It seems that over time the compounding will outweigh the taxation. Is there something I've missed?
Never.

You are effectively making a non-deductible contribution. Unless you have insufficient space in your tax-advantaged accounts for the tax inefficient portions of your Asset Allocation, you are turning earnings taxed at capital gains rates to being taxed at ordinary income tax rates.

Your previous employer is not where you made the excess deferral and very few of them will agree to return the excess you contributed somewhere else. You made the excess deferral to your current employer. They are the ones you should request return of the excess deferral and earnings after you receive your W-2s from both employers.
I'm not sure I understand. Although the excess deferral is effectively a non-deductible contribution, does it not still have the tax-sheltering effect of being in the 401k? One caveat I forgot to mention is that as a result of overcontributing at my new company, I received an immediate vesting company matching of ~$7k. If I requested a corrective distribution from my new company, I would forfeit this matching. Therefore, my overcontribution of $14k ($7k from myself, $7k matching) seems to outweighs the taxation when considering long term compounding.

lakpr
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Re: 401k Overcontribution

Post by lakpr » Fri Dec 07, 2018 1:23 pm

Regarding the question of when does long term compounding outweigh the double taxation, I think it is when the amount you overcontributed had earned enough to compensate the double taxation.

So if you over contributed $1000, and your marginal tax rate is 22%, you will not have broke even until your balance reached $1000 * 1.22 * 1.22 = $1448.40

The first 1.22 is to account for the fact that you are contributing post tax amount, and the second 1.22 multiplier is to account for the fact that the total amount is taxed at 22% when you withdraw it

Spirit Rider
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Re: 401k Overcontribution

Post by Spirit Rider » Fri Dec 07, 2018 3:47 pm

chemeng wrote:
Fri Dec 07, 2018 12:32 pm
I'm not sure I understand. Although the excess deferral is effectively a non-deductible contribution, does it not still have the tax-sheltering effect of being in the 401k?
As I stated before, this is the same as making non-deductible traditional IRA contributions and 401k employee after-tax contributions and never rolling over to a Roth. You are turning after-tax investments taxed at capital gains tax rates into being taxed at ordinary income tax rates. The only benefits are the lack of minimal tax-drag and tax-free rebalancing. This is far different than the significant benefits of pre-tax deferred investments.
One caveat I forgot to mention is that as a result of over contributing at my new company, I received an immediate vesting company matching of ~$7k. If I requested a corrective distribution from my new company, I would forfeit this matching. Therefore, my overcontribution of $14k ($7k from myself, $7k matching) seems to outweighs the taxation when considering long term compounding.
This does significantly change the calculation, especially if you can get a previous employer to remove unmatched excess contributions.

Spirit Rider
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Re: 401k Overcontribution

Post by Spirit Rider » Fri Dec 07, 2018 3:56 pm

lakpr wrote:
Fri Dec 07, 2018 1:23 pm
Regarding the question of when does long term compounding outweigh the double taxation, I think it is when the amount you overcontributed had earned enough to compensate the double taxation.

So if you over contributed $1000, and your marginal tax rate is 22%, you will not have broke even until your balance reached $1000 * 1.22 * 1.22 = $1448.40

The first 1.22 is to account for the fact that you are contributing post tax amount, and the second 1.22 multiplier is to account for the fact that the total amount is taxed at 22% when you withdraw it
That would be true if the only comparison was from ordinary income tax rates to incomes tax rates (discounting ER differences and tax drag). However, assuming that returned excess contributions were invested in taxable accounts. The difference would be the (compounding of the taxable ER + tax drag) + the capital gains tax rate vs. the (compounding of the 401k ER) + the ordinary income tax rate.

dcop
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Re: 401k Overcontribution

Post by dcop » Fri Dec 07, 2018 7:25 pm

Like most I would do everything to get this rectified as the OP has now done.

I'm curious tho - how much would this mistake cost the OP with taxes and penalties and whatever if it wasn't dealt with? Assuming 12% bracket.

H-Town
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Re: 401k Overcontribution

Post by H-Town » Fri Dec 07, 2018 7:30 pm

dcop wrote:
Fri Dec 07, 2018 7:25 pm
Like most I would do everything to get this rectified as the OP has now done.

I'm curious tho - how much would this mistake cost the OP with taxes and penalties and whatever if it wasn't dealt with? Assuming 12% bracket.
Don't you have until 4/15 next year to correct the over-contribution? It's not hard to fix it. Wait until you receive the W-2's and go talk to whoever in charge of payroll in your company.

You're facing 12% tax on the amount of over-contribution and then whatever tax bracket when you take the money out in retirement. Penalty for excess contribution is 6%.

Spirit Rider
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Re: 401k Overcontribution

Post by Spirit Rider » Fri Dec 07, 2018 8:03 pm

H-Town wrote:
Fri Dec 07, 2018 7:30 pm
Penalty for excess contribution is 6%.
The 6% excise tax on unremoved excess contributions does not apply to qualified plans.

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