I overcontributed to my 401(k). What are my options?

By Denise Appleby AAA
A:

If you overcontributed (made excess deferral contributions) to your 401(k) plan account, you should notify your employer or the plan administrator immediately. Ideally, this notification should be provided by March 1 of the year following the year the excess deferral occurred. This means that if the excess deferral occurred in 2007, the notification should be provided by March 1, 2008. The excess deferral amount should be returned to you by April 15 (for example, if the excess deferral occurred in 2007, it should be corrected - that is, removed from the account - by April 15, 2008). Excess deferral amounts returned to you should include earnings accrued on the excess amount while it was in your 401(k) plan account. You are required to add the earnings to your taxable income for the year the excess amount is distributed from your 401(k) plan account. In addition, if the excess amount was deferred on a pre-tax basis, your employer must amend your W-2 to show the returned amount as wages.

For example, assume your excess deferral occurred in 2007 and you provided timely notification to your plan administrator. If your contributions were made on a pre-tax basis, your employer must amend your W-2 for 2007 to show the excess deferral amount as taxable wages (in box 1).

If the excess contribution is returned to you in 2007, any earnings included in the amount returned to you should be added to your taxable income on your tax return for 2007.

If the excess contribution is returned to you in 2008, any earnings included in the amount returned to you should be added to your taxable income on your tax return for 2008.

If the excess amount is not returned to you by April 15, you could pay taxes on the amount twice - in the year the excess occurred and in the year it is returned to you - in addition, you will be taxed on the earnings in the year the excess is returned to you.


To learn more, visit Introductory Tour Through Retirement Plans and Introducing The Roth 401(k).

This question was answered by Denise Appleby
(
Contact Denise)

RELATED FAQS

  1. Are part-time employees eligible for fringe benefits?

    Learn how offering fringe benefits allows employers to entice new talent to join their teams, although part-time workers ...
  2. What is the difference between arbitrage and hedging?

    Dive into two very important financial concepts: arbitrage and hedging. See how each of these strategies can play a role ...
  3. Who is exempt from paying Social Security taxes?

    Learn about the groups of people who qualify for exemption from Social Security taxes, and explore the process of applying ...
  4. How do you trade put options on E*TRADE?

    Learn all about put option trading at E*TRADE. Explore margin accounts and become familiar with the different types of option ...
RELATED TERMS
  1. Senior Move Manager

    Senior move managers (SMMs) help seniors downsize and relocate ...
  2. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  3. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  4. Death Master File (DMF)

    Also known as Social Security Death Index. A list of people whose ...
  5. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
  6. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...

You May Also Like

Related Articles
  1. Options & Futures

    A Detailed Look Into China's Options ...

  2. Options & Futures

    Avoid These 10 Mistakes When Trading ...

  3. Professionals

    Just Retired? No Better Time for a Second ...

  4. Professionals

    When Your Client's Retirement is Around ...

  5. Professionals

    A New Wake-up Call for Savers

Trading Center