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401K Overcontribution

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  •  erf24 
    Participant
    Status: Physician
    Posts: 1
    Joined: 02/08/2019

    In 2018 I had two jobs and ended up over contributing to my 401K by about 2200 dollars.  I understand that if I withdraw the excess I won’t be penalized, but from what I’ve read the penalty is a 6% fee.

    It seems to me like that is still kind of a bargain.  If that money would have otherwise been taxed at 35% (based on my bracket) it seems like it makes sense strategically to over contribute as much as I can.

    Is there something I’m missing?  Does it make more sense to pull out that excess contribution or leave it be and pay the fee?  I’m inclined to leave it – and potentially do the same thing for the coming year.  I spoke briefly with a tax advisor from a big firm but they didn’t provide me with a clear answer.

    Thanks!

    #189145 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6656
    Joined: 01/09/2016

    It’s not quite so simple – or harmless – as that. You owe an excise tax of 6% for every year the excess is left in the plan (beyond April 15 – you will owe no excise tax if removed by the tax deadline). If the excess is not removed by April 15, it is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan (by the plan administrators), the plan may not be a qualified plan.

    iow, it is up to the plan administrators to put systems in place to prevent this from happening. If they fail to do this and an employee’s overcontribution is not corrected, the employee could put the whole plan at risk.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #189219 Reply

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