Excess Deferrals (2024)

FAQs

Excess Deferrals? ›

Excess deferrals typically happen when a participant contributes to more than one employer's retirement plan in a tax year.

Deferrals more than the annual 402(g) limit are called “excess deferrals.” If excess deferrals are not corrected timely, the excess deferrals (including earnings on the excess during the taxable year) will be taxable income to you.

People who overcontribute to a 401(k) can be subject to consequences such as being taxed twice on the amount above the contribution limit of $23,000 in 2024 ($30,500 for those age 50 or older) and a 10% early distribution tax if you're under 59.5 years old.

Excess deferrals are treated as wages for income tax purposes, but not for withholding purposes. Any excess deferrals must be combined with the employee's wage income and reported on the line for wages, compensation, tips, etc., on page 1 of Form 1040 for the year of the excess deferral.

The first step to correcting a 402(g) excess deferral is notifying the plan's recordkeeper of the amount of the excess deferral. The recordkeeper will then calculate the earnings attributable to the excess and issue a distribution to the participant in the amount of the excess, plus earnings (or less losses, if any).

through payroll withholding. Excess contributions must be included as income for the year in which the contributions were made. If the excess contributions haven't already been claimed in that year, the return will need to be amended to include the excess distribution as income.

An overcontribution is any amount that someone sets aside to a tax-deductible retirement plan that exceeds the maximum allowable contribution for a given period. The IRS imposes a 6% penalty for each year that any excess amount contributed remains in a retirement account until it is rectified.

What is the 401(k) early withdrawal penalty? If you withdraw money from your 401(k) before you're 59 ½, the IRS usually assesses a 10% tax as an early distribution penalty. That could mean giving the government $1,000, or 10% of a $10,000 withdrawal, in addition to paying ordinary income tax on that money.

Can you withdraw excess contributions? ›

The IRS allows you to withdraw the excess contribution from a Roth IRA without penalty if you meet the distribution requirements: You must be 59½ years old. You must have held the Roth IRA for a period of five years.

The IRS requires the 1099-R for excess contributions to be created in the year the excess contribution is removed the from your traditional or Roth IRA. Box 7 of the 1099-R will report whether you removed a contribution that was deposited in the current or prior year for timely return of excess requests.

Remove the excess within 6 months and file an amended return by October 15—if eligible, the excess plus your earnings can be removed by this date. Remove the excess once discovered, even after October 15. You'll need to reduce next year's contributions by the amount of the excess.

The IRS does require withholding, at a rate of at least 10%, on distributions of earnings attributable to returns of excess contributions to Roth IRAs, unless you elect NOT to have withholding apply by indicating this on your Return of Excess request.

Earnings on excess deferrals are taxed as income in the year withdrawn (2022). Excess deferrals aren't subject to the 10% early distribution tax, 20% withholding, or spousal consent requirements.

Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. The tax can't be more than 6% of the combined value of all your IRAs as of the end of the tax year.

Roth IRA excess contributions are contributions that exceed your annual contribution limit for the year.

Contributing more to your health savings account (HSA) than the IRS limit for the tax year creates excess contributions. All excess contributions are subject to income tax and a 6% excise tax each year until corrected. For the current annual IRS limits see Section D question #1 of the HSA FAQs.

Traditional and Roth Excess Contribution Removal Deadline

This is typically April 15 of the following year (or October 15 if you're filing an extension).