I just started gathering my tax papers for 2005 and noticed that I have inadvertently exceeded the $14k 401k limit for the year. I changed employers in 2005 and so had already invested about $2500 at the first employer before closing that account, and rolling it over to an IRA. I then put the full $14k into my new 401k plan at my new employer. Dunno how I managed not to think of the obvious for close to a year, but it seems to be the case. What are my options?At best, I suppose only $14k of the 401k contributions will be pre-tax, but is there any provision for after-tax dollars going into a 401k above the $14k limit? If not, how exactly do you "take back" an investment to satisfy the IRS?
I would ask your question on the Tax Strategies board. There are several tax pros there.http://boards.fool.com/Messages.asp?bid=100155IF
I had the same situation, but discovered it prior to year-end and did some investigation. I was told that my only option was to contact my plan administrator and explain the situation to them, then ask for a return of the excess contribution before the tax due date (ie April 15). That amount would have to be removed from the 401k and included in taxable income. If you don't remove it from the account, you still have to include it in taxable income, however, you can't use the amount as a "basis" when you start to draw out the retirement amount. That means you will be taxed 2X on that amount. I don't remember if there was also a penalty on the excess, but I don't believe so. Also, there is no provision to carry over the excess to the following year (I also checked on that). It would only be includable in the year you actually had it withheld.Anyway, the best option is to contact the plan adminstrator and see what your options are. I hope this helps.
There is a penalty on excess, in the realm of 6%.
...ask for a return of the excess contribution before the tax due date (ie April 15). That amount would have to be removed from the 401k and included in taxable incomeI'm considered in the 'highly-compensated' group of my plan, and a number to times we haven't met the guidelines so excess contributions and the earnings allocated to them have been paid back out to me from the 401K by April 15th. In my case there was a question as to what tax year it gets reported in. According to the papers I received from the plan, the excess contribution should have been included in income in the same year as it was attributed to the plan. According to my accountant, it gets included in income the following year. Your guess is as good as mine--I included it in the following years income.2old
I don't remember if there was also a penalty on the excess, I know IRAs have a penalty of 6% of the excess amount per year until it is withdrawn. I don't know if the same applies to excess 401(k) contributions.foolazis
Since you have already rolled over the first 401K, contact the administrator for the current 401K. Explain that you overcontributed and need to take a distribution to correct the problem. Hopefully, they will be helpful and not try to make you withdraw the overcontribution from the other plan. The overcontribution and the income associated with the overcontributions have to be promply distributed to avoid penalties. The administrator will calculate the appropriate amount of the distribution. The sooner you make the request the better. Administrators can be overloaded as April 15th approaches. If the distribution does not occur by April 15th, request an extention. Since the distribution will occur in 2006, the 1099-R is technically a 2006 document and is not required to be issued until January of 2006. Check with the tax board about how to report the over contribution for 2005. I believe, that the over-contribution is added back into 2005 income and the income on the over-contribution will be subject to tax and early withdrawl penalty in 2006. Since it is only the income on the $2,500, the early withdrawl penalty should be fairly small. Once over-contribution penalties start they can become very nasty. If left to long the contributions can carry an annual penalty and be taxed twice (contribution and distribution years). Debra
Thanks everyone. it's helpful to know I have options. I'll contact my current 401k administrator.
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