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. What is the minimum amount of money that I can invest in a mutual fund?

    Learn about investing in mutual funds even with a smaller initial investment; there are many funds available to investors ...
  2. What are the best ways to plan for retirement?

    Learn the basic steps to creating a solid retirement plan that can support you and your family, and find out how to manage ...
  3. How can I consolidate my unsecured debt?

    Discover some of the different ways that you can combine your present unsecured debts into a consolidation loan -- even by ...
  4. How do Pay As You Go pension plans work?

    Learn how pay-as-you-go pension plans are different than fully funded pension plans and why some government plans are running ...
RELATED TERMS
  1. Elder Care

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

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

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

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

    A company that owns or controls two or more banks. Mutlibank ...
  6. Short Put

    A type of strategy regarding a put option, which is a contract ...
Related Articles
  1. If that's always been your dream, there actually are affordable ways to retire in France. Some regions to explore and some cautions to keep in mind.
    Retirement

    Can You Afford To Retire In France?

  2. A delightful climate, World Heritage sites and a low cost of living are just some of the reasons to retire to Ecuador. Here's more about what to expect.
    Retirement

    Why Retiree Expats Adore Ecuador

  3. The names sound similar – continuing care, assisted living – but retirement communities differ widely. How to tell them apart and what you'll need to pay.
    Retirement

    Don't Pick The Wrong Type Of Retirement ...

  4. A description of the top retirement plans for self-employed
    Retirement

    Self-Employed? Top Plans For Retirement ...

  5. First time stock investors may ask, is there any way to buy insurance on stocks to prevent losses?
    Options & Futures

    Stock Safety: Top 3 Ways to Limit Your ...

Trading Center