401k overpayment dilemma
December 24, 2009 10:48 AM Subscribe
I overpaid into my 401k. What can/should I do?
I switched jobs last year, after maxing out my 401k. I signed up for withholdings at the new company, which has a matching program, so for the last couple months of the year I had additional contributions from that.
A few months later, I realized that I'd overpaid. Looking into it, it seemed the straightforward answer was to amend one of the W-2s and get the plan to refund me the overpayment. The problem is, the first company basically refused to do it, and in the second company I'd give up all their matching funds.
I'm hoping that, since this is just a tax issue, I can simply pay taxes on the overpaid amount directly to the IRS (which might allow me to keep my matching funds, hence the anonymous question -- I don't feel like it's cheating, but I can see how others might disagree). I've also seen some suggestions that the IRS itself should have picked up on this and sent me a 1099-R to make this correction. Any experts out there willing to weigh in?
I switched jobs last year, after maxing out my 401k. I signed up for withholdings at the new company, which has a matching program, so for the last couple months of the year I had additional contributions from that.
A few months later, I realized that I'd overpaid. Looking into it, it seemed the straightforward answer was to amend one of the W-2s and get the plan to refund me the overpayment. The problem is, the first company basically refused to do it, and in the second company I'd give up all their matching funds.
I'm hoping that, since this is just a tax issue, I can simply pay taxes on the overpaid amount directly to the IRS (which might allow me to keep my matching funds, hence the anonymous question -- I don't feel like it's cheating, but I can see how others might disagree). I've also seen some suggestions that the IRS itself should have picked up on this and sent me a 1099-R to make this correction. Any experts out there willing to weigh in?
I think you need to talk to an accountant / tax expert. The standard way of handling this is for the overage to be refunded to you during the next tax year, and then you declare and pay tax on it as income. However, if that's less than optimal (due to losing the employer match), you need to look at other options.
One thing you might be able to do is roll the previous employer's 401k over into either your current employer's plan, or into some other plan (you could even roll into a Roth if you want; this is often good for younger employees in relatively low tax brackets). In the process of performing the rollover, or once you have it rolled into the new plan, then it might be easier to extract the overage. (Maybe then you could get it refunded to you without dinging your employer match money.)
Assuming you're talking about more than a few hundred bucks I'd say it's definitely worthwhile to get some help doing your taxes this season, and probably sooner rather than later. Doing a rollover can take a bit of time and paperwork to accomplish.
posted by Kadin2048 at 11:00 AM on December 24, 2009
One thing you might be able to do is roll the previous employer's 401k over into either your current employer's plan, or into some other plan (you could even roll into a Roth if you want; this is often good for younger employees in relatively low tax brackets). In the process of performing the rollover, or once you have it rolled into the new plan, then it might be easier to extract the overage. (Maybe then you could get it refunded to you without dinging your employer match money.)
Assuming you're talking about more than a few hundred bucks I'd say it's definitely worthwhile to get some help doing your taxes this season, and probably sooner rather than later. Doing a rollover can take a bit of time and paperwork to accomplish.
posted by Kadin2048 at 11:00 AM on December 24, 2009
IRS page on the issue. Which says you only have until April 15, 2009 to remove excess contributions from 2008.
Did you pay taxes on the excess in your 2008 tax return?
posted by smackfu at 11:32 AM on December 24, 2009
Did you pay taxes on the excess in your 2008 tax return?
posted by smackfu at 11:32 AM on December 24, 2009
Talking to a tax accountant seems like it would probably be worth it.
If you look at page 10 of this PDF, it does look like the only penalty you pay is that you need to amend your tax return to include the excess deferral as regular income. The effect then is that you are taxed twice on it. If that's true, it seems like a relatively straightforward calculation- do you make more money leaving it in there and paying tax on it, or by taking it out?
If you make more money taking it out, it looks like you can take it out of whichever plan you want, presumably the one that performs worse, or the one that had a lower employer match.
posted by gjc at 12:51 PM on December 24, 2009
If you look at page 10 of this PDF, it does look like the only penalty you pay is that you need to amend your tax return to include the excess deferral as regular income. The effect then is that you are taxed twice on it. If that's true, it seems like a relatively straightforward calculation- do you make more money leaving it in there and paying tax on it, or by taking it out?
If you make more money taking it out, it looks like you can take it out of whichever plan you want, presumably the one that performs worse, or the one that had a lower employer match.
posted by gjc at 12:51 PM on December 24, 2009
One data point: I did this a few years ago -- accidentally contributed something like $1000 too much because of a switch in jobs. I treated the $1000 as if I received it as pay and added it to my income and paid tax on it. This is not the legal way to handle the issue -- that involves more paperwork, but I figured that this was "good faith" enough, and a small enough amount in the grand scheme of things, that I would not be in much trouble if "caught." I never heard anything about it from the IRS.
posted by Mid at 2:21 PM on December 24, 2009
posted by Mid at 2:21 PM on December 24, 2009
To be a little clearer, I suppose I did not "add" the income so much as I "reduced" the deduction you would ordinarily take for 401k contributions and held it to the legal limit, which had the effect of making my "extra" contribution taxable.
posted by Mid at 6:45 PM on December 24, 2009
posted by Mid at 6:45 PM on December 24, 2009
This thread is closed to new comments.
posted by JohnnyGunn at 10:53 AM on December 24, 2009