correcting excess 401(k) contribution
Taxpayer (age 49) contributed $18,729 to her 401(k) in error last year.
Can she leave the excess $729 in the 401(k), treat it as a 2018 contribution, and pay the 6% penalty on it?
Where do you report this, I don’t see a place for it on Form 5329?
Is the excess contribution also treated as 2017 income in addition to the penalty?
Thank you,
Art Dicker
Permalink Submitted by Alan - IRA critic on Mon, 2018-03-12 16:59
These excess elective deferrals are handled differently than IRA excess contributions. Taxpayer will have 729 added to line 7 wages regardless of what they do. If the excess deferral amount is returned with earnings by 4/17 the 729 will not be taxed again, but the earnings will be taxable as additional 2018 wages. There is no penalty on the earnings or the excess and Form 5329 does not apply. If the excess is left in the 401k (which should only occur if more than one plan received deferrals and employers are not aware of the excess), the earnings stay in the 401k as well, but eventually down the road when RMDs or other distributions are taken from the 401k or from the rollover IRA where the 401k is rolled, the 729 will be taxed a second time. Therefore, if there are good earnings on the 729 it may make more sense to leave the excess in the plan. Note that earnings are calculated only from the date of the excess deferral until 12/31/2017, which will likely be a very short period of time. Again, if this was a single 401k plan, taxpayer should be receiving a check for the 729 plus earnings before 4/17 and would not have a choice to leave the excess in the plan. 2017 return will only be affected by adding the 729 to line 7 wages. Earnings reported on 2018 return line 7.