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Hi there, hoping someone here might be able to point me in the right direction! It's wild to me how I almost always get better advice/info here than people who are actually paid to know this information (!)
Context:
- I have a Self-Employed 401k through Fidelity where I made tax-deferred contributions to via my 1099 sole-proprietorship income.
- I also have a employer-sponsored 401k, also through Fidelity, where I contributed a very small amount in year 2022 (far less than the limit).
- I over-contributed to this Self-Employed 401k by $2,500 for year 2022 (I had contributed in October 2022 and ended up working less shifts in the coming months, reducing my total contribution cap).
- This $2,500 over-contribution was an employER contribution (not employee) and was done during the actual year 2022.
- The over-contribution was put into a mutual fund position that lost money during that period of time.
- I have NOT yet filed my taxes for year 2022
- I have reviewed prior WCI forum posts and Googled to see if this question has been answered before (seems like it could be a relatively common occurrence for our community?)
Question:
- Can I remove an excess employER contribution without paying any penalty? Reviewing prior Spiritrider posts on WCI forums, this seems like the answer is "no."
- Barring that, can I reclassify my employER contribution to an employEE contribution and would that somehow change things? I'm guessing the answer is also "no."
- Barring the above, how do I go about paying fees and completing this process correctly? It looks like I have to fill out Form 5330? I'm not sure how I would do this with Turbotax (I have Home & Business downloaded edition). Do I have to fill out multiple 5330s for 2022 and 2023? I'm so lost on this process...
Additional Info:
- I called Fidelity last week and their agent told me it would be an easy fix, that I would have to sell the $2,500 position first (to convert it to cash reserves), and that I could then complete a form via Fidelity that would allow me to withdraw it. She said Fidelity would then issue a 1099-R for year 2023, and I would have to complete a Letter of Communication to the IRS to explain the situation. She told me it was too late to have any 1099-R filed for this tax year 2022.
- Given that there were no gains (only losses) on the $2,500 excess contribution, she told me there would not be any penalties.
- It's been several days now and Fidelity has not sent any form or link to complete the withdrawal.
- I called Fidelity back today, and a different agent gave me a very different story -- he said that my only option was to roll the $2,500 over as a 2023 contribution, and pay a 10% fee as a result, and to complete IRS Form 5330 on this year's taxes.
- When I mentioned my prior conversation with the first Fidelity agent a few days ago, he said that only applied to IRAs (despite being exceedingly clear that it was a Self Employed 401k during my initial conversation with the first rep). Of course he could not find any notes from that initial conversation...
- I've tried searching both these forums and Google without a ton of success. I've found that most of the information given applies to employer sponsored 401ks, not Self Employed 401ks (where I am the owner as a sole-proprietor)
- The most pertinent article that I have found from Google comes from Solo401k.com (not sure how credible this source is), which states (bold my emphasis, for what seems pertinent to my situation):
If at all possible, you want to withdraw the excess amount from your Solo 401k before the end of the tax year (Dec. 31). If that is not possible, your next choice is withdrawing it before tax day.
If the excess contribution was made to an employer-sponsored plan (other than your Solo 401k), contact your employer or plan administrator. Tell your plan administrator you’ve made an “excess deferral.” The plan administrator will return the excess funds to you as a “corrective distribution.” They will also calculate and return the additional earnings (if any) and issue new paperwork that corrects the over-contribution. If the excess contribution happens in your Solo 401k, you’ll need to take these actions as the plan administrator.
You will also need a new W-2 and have to pay the taxes on the additional income for the year. Your income will increase by the amount of the returned excess contribution plus the earnings. Essentially, your tax bill will rise (or your refund will be reduced) relative to the amount of the excess 401k contribution.
If you do not complete these actions before tax day (April 15 most years or July 15 for 2020), you will face the double taxation penalty.
Report corrective distributions on IRS Form 1099-R. Your Solo 401k needs to issue a copy for your personal records and send a copy to the IRS.
- The most relevant WCI forum post I've found has Spiritrider suggesting that employER contributions are NOT removable, but that there might be an option to reclassify employER contributions as employEE contributions to get around this?
- Given that I hit the cap on my solo-401k regardless, I suspect any reclassification would not be helpful.
- So all that to say -- it looks like I'm going to owe 10% excise tax on $2500 ($250). Is there any advise on how to complete this most efficiently?
Thank you in advance for any help, anyone!
Context:
- I have a Self-Employed 401k through Fidelity where I made tax-deferred contributions to via my 1099 sole-proprietorship income.
- I also have a employer-sponsored 401k, also through Fidelity, where I contributed a very small amount in year 2022 (far less than the limit).
- I over-contributed to this Self-Employed 401k by $2,500 for year 2022 (I had contributed in October 2022 and ended up working less shifts in the coming months, reducing my total contribution cap).
- This $2,500 over-contribution was an employER contribution (not employee) and was done during the actual year 2022.
- The over-contribution was put into a mutual fund position that lost money during that period of time.
- I have NOT yet filed my taxes for year 2022
- I have reviewed prior WCI forum posts and Googled to see if this question has been answered before (seems like it could be a relatively common occurrence for our community?)
Question:
- Can I remove an excess employER contribution without paying any penalty? Reviewing prior Spiritrider posts on WCI forums, this seems like the answer is "no."
- Barring that, can I reclassify my employER contribution to an employEE contribution and would that somehow change things? I'm guessing the answer is also "no."
- Barring the above, how do I go about paying fees and completing this process correctly? It looks like I have to fill out Form 5330? I'm not sure how I would do this with Turbotax (I have Home & Business downloaded edition). Do I have to fill out multiple 5330s for 2022 and 2023? I'm so lost on this process...
Additional Info:
- I called Fidelity last week and their agent told me it would be an easy fix, that I would have to sell the $2,500 position first (to convert it to cash reserves), and that I could then complete a form via Fidelity that would allow me to withdraw it. She said Fidelity would then issue a 1099-R for year 2023, and I would have to complete a Letter of Communication to the IRS to explain the situation. She told me it was too late to have any 1099-R filed for this tax year 2022.
- Given that there were no gains (only losses) on the $2,500 excess contribution, she told me there would not be any penalties.
- It's been several days now and Fidelity has not sent any form or link to complete the withdrawal.
- I called Fidelity back today, and a different agent gave me a very different story -- he said that my only option was to roll the $2,500 over as a 2023 contribution, and pay a 10% fee as a result, and to complete IRS Form 5330 on this year's taxes.
- When I mentioned my prior conversation with the first Fidelity agent a few days ago, he said that only applied to IRAs (despite being exceedingly clear that it was a Self Employed 401k during my initial conversation with the first rep). Of course he could not find any notes from that initial conversation...
- I've tried searching both these forums and Google without a ton of success. I've found that most of the information given applies to employer sponsored 401ks, not Self Employed 401ks (where I am the owner as a sole-proprietor)
- The most pertinent article that I have found from Google comes from Solo401k.com (not sure how credible this source is), which states (bold my emphasis, for what seems pertinent to my situation):
If at all possible, you want to withdraw the excess amount from your Solo 401k before the end of the tax year (Dec. 31). If that is not possible, your next choice is withdrawing it before tax day.
If the excess contribution was made to an employer-sponsored plan (other than your Solo 401k), contact your employer or plan administrator. Tell your plan administrator you’ve made an “excess deferral.” The plan administrator will return the excess funds to you as a “corrective distribution.” They will also calculate and return the additional earnings (if any) and issue new paperwork that corrects the over-contribution. If the excess contribution happens in your Solo 401k, you’ll need to take these actions as the plan administrator.
You will also need a new W-2 and have to pay the taxes on the additional income for the year. Your income will increase by the amount of the returned excess contribution plus the earnings. Essentially, your tax bill will rise (or your refund will be reduced) relative to the amount of the excess 401k contribution.
If you do not complete these actions before tax day (April 15 most years or July 15 for 2020), you will face the double taxation penalty.
Report corrective distributions on IRS Form 1099-R. Your Solo 401k needs to issue a copy for your personal records and send a copy to the IRS.
- Given that I hit the cap on my solo-401k regardless, I suspect any reclassification would not be helpful.
- So all that to say -- it looks like I'm going to owe 10% excise tax on $2500 ($250). Is there any advise on how to complete this most efficiently?
Thank you in advance for any help, anyone!
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