over contributing to a 401(k)

Submitted by Michael Porfido on Thu, 2020-04-30 22:28

My client mistakenly put in $1,968 excess contribution to his 2019 401(k). He just found this out yesterday. We did a rollover last month from this 401(K) so now all the money is in his IRA.
How would we go about correcting this excess contribution?



Submitted by Alan - IRA critic on Fri, 2020-05-01 01:13

  • His 2019 return should have the wage income increased by 1968. Most tax programs will do this automatically when the Box 12 total on the W-2 exceeds the limit. If he has already filed 2019, he should check to see if the wage amount is correct. If not, he will have to amend the 2019 return.
  • The plan may have told him the amount of earnings on the 1968. The earnings will be taxable on his 2020 return, and he will probably get 3 1099R forms next January. One coded G for the allowed amount of the rollover, one coded P for the 1968 (which should already have been added to 2019 wages, and one for the earnings on the 1968, which should be added to 2020 wages.
  • Finally, the amount rolled over in excess of the allowed amount is an excess IRA contribution for 2020. If he has been provided with this figure (1968 plus earnings), he should request a corrective distribution from the IRA of this excess amount. The IRA custodian will process the return of the excess. If there was also IRA earnings on the excess, that will be taxable income on the 2020 return as well, and he will get a 1099R for the IRA corrective distribution next January as well.
  • The plan should have been able to give him the figure including the gain or loss on the 1968, so he will be able to request the IRA corrective distribution now. The gain or loss includes the period from the time of the excess contribution through 12/31/2019. 

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