Excess 401(K) Contribution
Taxpayer erroneously deposited/contributed $23,000 for a 401(K) in March 2024 for tax year 2024. When the income tax returns were completed, there was no earned income to support the 401(K) contribution so it was not reported (deducted) on the return. Taxpayer wants the funds returned but custodian is going to report this as a taxable distribution with mandatory withholding They didn’t receive the deduction but now they have to pick up the income? Is there any recourse for this?
Permalink Submitted by Alan - IRA critic on Wed, 2024-12-18 13:17
Please recheck the applicable years. You probably mean 2023 for the 401k contributions. Is this a solo 401k for a self employed business owner?
Permalink Submitted by Marina Ferrone on Wed, 2024-12-18 15:06
Good catch – the contribution was made in March of 2023 for tax year 2023. The taxpayer is partner in a partnership.
Permalink Submitted by Alan - IRA critic on Wed, 2024-12-18 16:12
The deadline to have 2023 excess deferrals and allocated earnings to a 401k distributed was 4/15/2024. Not having done this and not qualified for the deduction, these amounts will be subject to taxes a second time, but not until they are withdrawn, which may well be in retirement or as RMDs.
While that’s unfortunate, there is no requirement to distribute this excess and incur the additional tax and early distribution penalty anytime soon. They are better off to just leave this balance in the 401k and let it generate earnings over many years and not make the same error again.