401K Overcontribution Correction

IBM
Nrxx72

Go to company page IBM

Nrxx72
Feb 28 4 Comments

Hi all,
On a 401K Overcontribution had a question post the correction on tax-related documents. So Fidelity says they have taken the excess contribution out (before Apr 15th) -with no tax deducted from pre-tax contribution- and I will be receiving a 1099R on 2023 to file with my taxes for 2023 and pay the taxes owed.
My confusion is this overcontribution was for 2021 and the correction happened in 2022, so my W2 that i will use to file taxes for 2021 will have this excess no in the sections. As per fidelity as the excess money (though earned in 2021) were not earned then as they sat in a 401K account- they were 2022 earnings. So I pay taxes for them on 2023. Wondering if a W2 correction or is is needed.

Any thoughts? I am confused on what tax document to use for my 2022 taxes. My option on this scenario is: FIle my taxes this 2022 with the W2 and then once i receive the 1099R next year, file and pay the taxes for the excess pre-tax amount on my 2023 taxes.

Is that scenario the right one? Please share any experiences on this. Thanks!!

comments

Want to comment? LOG IN or SIGN UP
TOP 4 Comments
  • Google
    Wespa

    Go to company page Google

    Wespa
    Had the same thing last year, just resolved it. Any excess contribution is automatically taxed as income (play with Turbo tax to test). What matters is that it was taken before April 15th. So no worry, you’re paying taxes on the excess when filing for 2021 taxes.

    The IRS is clear on the topic. Next year, your you will receive two 1099-R one with the excess contribution with the code P (not taxed in 2022), one for the interest with the code 8 (this one will be taxed)
    Be very careful next year, make sure they don’t put the whole thing with a code 8 or you will pay taxes twice!

    Feel free to talk to a CPA. Half of these financials institutions got it wrong. Be super careful.

    https://www.irs.gov/instructions/i1099r#en_US_2022_publink1000291954
    Feb 28 2
    • IBM
      Nrxx72

      Go to company page IBM

      Nrxx72
      OP
      @Google Thanks a lot for your response here! The link is really helpful for more clarity- based on the reference the rule is- If distributed by April 15 of the year following the year of deferral, the excess is taxable to the participant in the year of deferral (other than designated Roth contributions), but the earnings are taxable in the year distributed.
      So for an overcontribution (all pre-tax 401K) in 2021 the excess needs to be taken out by Apr 2022, the taxes for the excess is due in Apr 2022 (meaning the 2021 taxes) and the earnings are taxed the next year (meaning 2022 taxes). You receive no real tax form and the 1099R comes on Jan 2023 (which can be used for the 2022 taxes)- with a P (meaning taxes paid :))

      Quick question? Did you have to go for a W2-correction or go for any other tax documents (except your W2s) for filing the taxes on the year of excess (i.e this year's taxes in my case for 2021 earnings)- or once you upload the W2s to turbotax the taxes for the excess are auto-due for this years filing. Just making sure i am not expected to attach another tax forms or so to my filing for the correction.
      Mar 1
    • Google
      Wespa

      Go to company page Google

      Wespa
      Yes to the first part! Best very careful next year. I almost got screwed $2k in taxes with the coding as Vanguard didn’t know what they were doing. In 2023, you will get two 1099-R, one with the principal and the letter P (taxes already paid), and one for the interest with the code 8 (you will be taxed on that).

      I didn’t get a corrected w2. In my case, H&R automatically compute this (play with the 401k contribution in the w2 to check this). Yes, anything over $19,500 is automatically taxed. That’s why you need to get it back or will be taxed again when withdrawing the 401k. If you change anything (I would not), carefully observe how the tax owned changes (check with a second software if needed).
      Mar 1
  • Upgrade
    nhJB84

    Go to company page Upgrade

    nhJB84
    Just talk to a CPA
    Feb 28 0