Can excess 401K deferral be withdrawn from an IRA?
A client switched jobs in 2024 and overcontributed to their 401k by about $7,800. This was not corrected before the April 15th deadline, and the return is currently on extension. The prior employer’s 401K account was rolled over to an IRA account in 2024. Can the excess 401K deferral be withdrawn from the IRA account it was rolled into? My understanding is that only excess contributions made directly to the IRA account can be withdrawn by the extended deadline and the rollover contribution does not qualify. Is it too late to take any corrective action on the excess deferral?
What is the tax treatment on the excess deferral of future IRA distributions? Does the excess 401k deferral create basis in the IRA account it is rolled into?
Permalink Submitted by Alan - IRA critic on Tue, 2025-05-06 17:26
Yes, it is too late, and there is no corrective action available after 4/15.
The 2024 return will have to report the excess deferral amount on line 1h of Form 1040. The rollover to an IRA of the excess deferrals is legal but will not become IRA basis even though the excess will have already been taxed. Once in the IRA there is no longer a reason to track the amount of the excess deferrals. It will eventually be taxed a second time when it is distributed from the IRA, but that might not happen until RMDs begin. And this amount will continue to generate IRA investment gains that are tax deferred, so in the long run this error may not be very costly at all.
Note that if the client made Roth 401k excess deferrals, there are additional considerations to the above.
Permalink Submitted by Laura Coen on Tue, 2025-05-06 18:33
Thank you for confirming!