7

Normally the max you can contribute to a 401(k) is $18,000, which I did. But I guess there's some sort of top-heavy test or highly compensated employee test or some such that my company failed so now I'm getting refunded more than half of what I put in.

My question is how this'll work for my taxes. I'm assuming I'll be getting a 1099-R for this income. For early withdrawals you have to pay a 10% penalty. Will I need to pay that? That would be very frustrating if I did since this isn't exactly a consensual withdrawal but whatever.

Also, does this income mean that I'll need to do a quarterly tax filing (1040-ES) to avoid owing late penalties?

  • 1
    You should also ask the company what they expect for this year, that way you can adjust your 401K now so that you don't have to get another check in March of 2018. – mhoran_psprep Mar 15 '17 at 23:01
6

Your employer would have paid a 10% penalty if they didn't return the excess contributions by March 15, but that's probably little consolation.

You do not owe penalties, you will receive a 1099-R next year and include the amount listed in your income tax for 2017. When you receive the check you should also receive a pay advice that notes whether any taxes were withheld.

If you haven't under-withheld taxes in the past, a quarterly filing is not necessary. You may wish to submit a new W-4 to your payroll office to avoid a hefty tax bill next April.

  • They said the money would be taxable for 2017. – neubert Mar 15 '17 at 16:02
  • I haven't gotten the 1099-R yet (or even a check for that matter!) but when I get the 1099-R I'll post what it says for that box. – neubert Mar 15 '17 at 16:10
  • @NathanL: A distribution code 8 would make it taxable in 2017, which is correct in this case. – user102008 Mar 15 '17 at 21:05
  • @user102008 Yes, I reviewed IRS pubs 525 and 575 and I stand corrected. I'll update my answer. – Nathan L Mar 15 '17 at 21:31
5

No, you won't have to pay any penalties. This happened to me every year for a previous employer.

You'll get a distribution on the excess and some investment gain on the excess, and that amount is taxable income. I'm not sure offhand if it will be taxable for 2017 or 2016.

I imagine that the distribution is much less than your annual salary so I wouldn't worry about filing a 1040-ES. It should change your annual tax by a small enough amount that it doesn't matter.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.