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overcontributed to 2021 plan; what now?

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  • overcontributed to 2021 plan; what now?

    I left my residency in Nov (started late) and started my first job Dec 1st. I maxed out my residency 403b and I was told I could start contributing to my new plan mid January. So I did and theyre saying I still overcontributed by $3000. I requested they rescind the first contribution - which they will do but wont send me a revised w2. so now i will get hit with a penalty untl 2023 correct? Is there anything I can do? My first mistake out of residency, bummer...

    Thanks!

    Oo

  • #2
    I don’t think there will be a penalty if reversed (plus gains) before the return deadline. Just the taxes due on the excess contribution and gains. If there is a penalty it’s only 10%.

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    • #3
      Confused - if you maxed out 2021 and you didn’t start with the new plan until 2022, are you saying you’ve already contributed $23,500 to your new plan? Exactly who is saying you overcontributed - new or old employer? If new employer, you won’t get a W2 until 01/23 and the overcontribution w/h/b adjusted out and the W2 you receive s/b correct. There is no W2 to revise - what am I missing?
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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      • #4
        I guess im confused why 1. they wont send me a revised w2 after they rescind the overcontribution and 2. why they have to do it before tax day if theyre not sending me a revised w2/if i still need to pay the tax?

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        • #5
          correct me if I'm wrong but, according to your OP, you overcontributed in 2022, not 2021. If that is the case, your 2021 W2 is correct and the overcontribution will be adjusted through payroll for 2022. W2s will not be calculated and issued until Jan 2023 based upon 2022 transactions and final adjustments to those transactions (such as your overcontribution). The only revision you will notice will be on your paystub.
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #6
            Some clarification: Is mid January 2021 or 2022? If the latter, what jfoxcpacfp says is correct. If the former, but the over contribution was taken out in 2022, the 2021 W2 can’t be revised and you have to add the xs contribution plus earnings to your income.

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            • #7
              Similar to OP, I overcontributed to 401k for 2021 due to a change in employer. I already requested the excess be returned from Fidelity, and a check has been mailed. Fidelity says that I will get a 1099R for 2022 for the return of excess, which will be mailed in Jan 2023. My employer will not change my W2 for 2021. I am using turbo tax for 2021 tax filing. As far as I can tell, it doesn't matter what number I type into the box for 401k contributions for 2021. That number does not go anywhere on the 1040, or any other tax form, only on the W2s. My taxable income for 2021 appears to have already received the benefit of overcontribution, but this will be made up by having to pay those taxes on my 2022 taxes due to the return of excess. The only part I can't figure out is where any penalty of overcontribution would be generated by IRS? Certainly when I submit my taxes they will realize that I over contributed, based on my W2s. Will the IRS mail me some sort of statement saying that I owe taxes on the excess contributions for 2021 for the 2022 tax year?

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              • #8
                Originally posted by dgeottman View Post
                Similar to OP, I overcontributed to 401k for 2021 due to a change in employer. I already requested the excess be returned from Fidelity, and a check has been mailed. Fidelity says that I will get a 1099R for 2022 for the return of excess, which will be mailed in Jan 2023. My employer will not change my W2 for 2021. I am using turbo tax for 2021 tax filing. As far as I can tell, it doesn't matter what number I type into the box for 401k contributions for 2021. That number does not go anywhere on the 1040, or any other tax form, only on the W2s. My taxable income for 2021 appears to have already received the benefit of overcontribution, but this will be made up by having to pay those taxes on my 2022 taxes due to the return of excess. The only part I can't figure out is where any penalty of overcontribution would be generated by IRS? Certainly when I submit my taxes they will realize that I over contributed, based on my W2s. Will the IRS mail me some sort of statement saying that I owe taxes on the excess contributions for 2021 for the 2022 tax year?
                You will not owe the 6% excise tax since you took out the excess before the due date of your return. You’ll enter the info on the 1099R you get in January and that will take care of it.
                Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                • #9
                  I'm currently finishing this process due to overcontribution in 2020. Here's what I've learned:

                  The IRS term for this is excess salary deferral. There are "How To" guides on the IRS website as to how this should be fixed and what the consequences should be. Additional resources include the 1099-R Instructions, which describes how the 401(k) company should fill out your 1099-R.

                  If you request a corrective distribution from your 401(k) company prior to April 15 in the year after the excess deferral, then they return the excess with whatever it earned. There should not be any withholding or 10% penalty tax applied, because it's not a regular distribution. In this scenario, the excess is taxed in the same year the excess deferral occurred (ie, you will add it back into your income on top of the whatever was on your W2's). The earnings are taxable in the year the corrective distribution was received (next year's taxes).

                  Ideally, you should get two 1099-R's next year. One will be for the excess deferral and marked with code P indicating it is taxable in the previous tax year, and one will be for the earnings and marked with code 8 indicating it is taxable in the current year.


                  My 401(k) company messed this up and withheld the 10% penalty and gave me a 1099-R for 2021 with the sum of excess + earnings all with code 8. I'm in the process of getting them to fix this. It hasn't been easy.

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