Excess 401k contributions
individual age 37 has accumulated $8098 of excess contributions to her 401k over past couple of years. Does not remember ever getting notified by custodian of excess contributions in year they occurred. Custodian hasn’t provided what amount of the 8098 is excess contributions vs earnings on the excess contributions. If she takes out entire 8098 this year, clearly she’s taxed on earnings. Will she now be taxed on excess contributions a second time? will there be a 10% penalty on any of it. Tks.
Permalink Submitted by Alan - IRA critic on Thu, 2015-04-30 18:22
Are these excess elective deferrals, which are subject to a limit of around 17,500? Excess contributions are when the plan fails to pass discrimination testing and are totally different, as are excess annual additions (about 52,000 limit per employer). If elective deferrals were contributions made to more than one plan? Need to be sure exactly which limit has been breached, if any.
Permalink Submitted by Jody Howard on Fri, 2015-05-01 11:45
Yes elective, her money. The amount this year for her would only be 18000 for example. And yes only one plan.
Permalink Submitted by Alan - IRA critic on Fri, 2015-05-01 15:38
For 2014, the excess amount and earnings would have had to be distributed by 4/15/2015 to avoid eventual double taxation. Since this was not accomplished on time, at this point there is no benefit to a distribution. The excess amount over 17,500 will have to be added to line 7 wage income on the 2014 return. That is all that must be done. The excess remains in the plan and will eventually be taxed again several decades from now when distributions are taken. But the excess may also generate more in earnings that the excess deferral itself over many years. Taking out the excess now would just accelerate the second tax bill to the present and future earnings would not be generated. Same applies if there were excess deferrals in 2013. Plans usually have safeguards to prevent excess deferrals, but this plan apparently lacks those, so the individual needs to keep track of this himself for 2015 and beyond and stop deferrals when they approach the max limit.