I over-contributed to a 401k in 2020 due to front-loading my contributions then changing jobs to a place that auto-enrolled me in 401k contributions.
Delayed filing taxes because I’m owed refunds and didn’t want to deal with this issue. The over-contribution was only a few hundred dollars (assume $100), producing only a few dollars of interest in 2020 (assume $5).
I know I’ll have to take a distribution and pay an early distribution penalty. My question is: is it just the $105 that will need to be distributed and will the penalty be computed based on that for my 2020 taxes? For 2021, can I just take a larger-than-necessary over-contribution in lieu of calculating the exact amount required. Finally, my most pressing question: does this corrupt the entire 401k and am I safe to make contributions to it now?
Thank you in advance!
You may find these links helpful:
– [401(k) Fund Selection Guide](/r/personalfinance/wiki/401k_funds)
– [401(k) FAQs](/r/personalfinance/wiki/401k)
– [“How to handle $”](/r/personalfinance/wiki/commontopics)
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I think there’s a form you fill out with your most recent recordkeeper and request a refund of excess contributions. Then they adjust the value of your account as if those dollars did not have earnings attributed to it. Or, if this occurred through a payroll department, you can ask them to refund it, maybe.
1. Your $100 excess must be included in your 2020 income and is taxable. If you already filed, you will need to amend.
2. Your $100 excess must be included in your income for the year you withdraw it, and is taxable.
3. Your associated earnings on that excess must be included in your income for the year you withdraw them, and are taxable.
4. You owe a 10% penalty on #2 and #3.
These all take place because you failed to correct the excess by April 15th, 2021. Normally, it would only be #1 + #3 (if the excess is Roth) or #2 + #3 (if the excess was pre-tax).
> For 2021, can I just take a larger-than-necessary over-contribution in lieu of calculating the exact amount required.
No. It must specifically be processed as a 402(g) refund and only to the required amount. A standard withdrawal is not a corrective withdrawal and does not trigger the correct associated tax reporting needed.
>does this corrupt the entire 401k and am I safe to make contributions to it now?
It doesn’t prevent you from continuing to participate, however the 402(g) excess must be corrected through one of the employer plans you made contributions to that led to the excess. Failure to do so could lead to the IRS taking action.
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