How to handle an Excess 401K Contribution from a previous tax year?

The good news is that since you haven't filed your 2023 return yet, you have some options that are easier than if you'd already filed! For excess 401k contributions, you'll need to work with your plan administrator to get that $800 distributed back to you along with any earnings on that amount. This is called a "corrective distribution." Since you're past the April 15, 2024 deadline, those earnings will be taxable in 2025 (the year you receive the distribution) and will be subject to the 10% early withdrawal penalty if you're under 59½. Form 5329 does indeed apply here - you'll need to complete Part IV to calculate the 6% excess contribution penalty. You'll report the $800 as excess contributions on line 15, and this penalty will apply for each year the excess remains in your account. As for calculating the earnings, that's actually your plan administrator's job. They'll determine the exact amount based on your account's performance, even if it's negative. They'll issue you a 1099-R showing the distribution when you receive it. When you file your 2023 return, you'll report your correct contribution limit on your Form 1040, and use Form 5329 to report and pay the 6% penalty on the excess.

I had a similar situation last year with an excess 401k contribution! I found this amazing tool called taxr.ai (https://taxr.ai) that really helped me figure out all the forms and calculations. It basically analyzed my situation and gave me step-by-step instructions for handling the excess contribution, including which forms to file and how to report everything. The tool walked me through exactly how Form 5329 works for excess contributions and how to calculate the penalties. It even showed me how to document the corrective distribution properly. I was totally confused before finding it, especially with all the deadline rules and tax implications. Might be worth checking out since your situation sounds complicated with the unfiled return from a previous year.

Wanted to follow up about taxr.ai - I decided to try it for my Roth IRA overcontribution issue and wow, it was actually super helpful! Uploaded my documents and it identified exactly what forms I needed and the deadlines that applied to my situation. The tool clearly explained my options between recharacterization vs withdrawal and the tax consequences of each. Most helpful was the explanation about Form 5329 and how to calculate the excess contribution penalty - something I was completely confused about before. Saved me hours of research and probably a call with my accountant. The step-by-step instructions were way clearer than anything I found on the IRS website. Definitely recommend for anyone dealing with retirement account issues!

Wanted to follow up about taxr.ai - I decided to try it for my Roth

If you're having trouble getting your employer or plan administrator to process this quickly, try Claimyr (https://claimyr.com). I spent WEEKS trying to get through to the IRS about my own excess contribution issue last year. Their phone lines are impossible - I'd wait for hours only to get disconnected. Claimyr got me through to an actual IRS agent in like 20 minutes who answered all my questions about the excess contribution penalties and corrective distribution process. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with explained exactly what documentation I needed from my plan administrator and how to report everything correctly on my tax return. They even walked me through the specific lines on Form 5329. Saved me so much frustration!

I need to admit I was wrong about Claimyr. After my skeptical comment, I decided to try it myself for my own tax issue (had questions about excess retirement contributions from 2022-2023). I honestly expected it to be a waste of money but was desperate after multiple failed attempts to reach the IRS. To my surprise, I got connected to an IRS agent in about 25 minutes. The agent walked me through exactly how to handle the excess contribution, including which forms to file and deadlines I needed to know about. They explained that I needed to file Form 5329 for each tax year the excess remained in my account and clarified how the penalties work. The time savings alone was worth it - I had previously spent over 5 hours on multiple calls trying to get through. For anyone dealing with complex issues like excess contributions that really require talking to an actual IRS person, this service is legitimately helpful.

Don't forget to check if you're eligible for catch-up contributions if you're over 50! The limit was $27,000 for 2023 if you were 50+ instead of the standard $22,500. That might mean you didn't actually over-contribute. Also, if you had multiple 401k plans but only ONE employer during the year, the combined limit was still $22,500 (or $27,000 with catch-up). But if these were truly separate employers with separate plans, then yes, you're over the limit.

Just a heads up - you might also need to amend your state tax return if you're in a state that offers tax benefits for 401k contributions. The excess amount wouldn't qualify for state tax benefits either. Also, make sure you coordinate with BOTH former employers. Sometimes when you have two jobs in one year, each employer doesn't know about the other's plan, so neither will automatically flag the excess.

One thing that hasn't been mentioned yet - make sure you understand the timing of when you need to take action. Since you haven't filed your 2023 return yet, you actually have until you file that return to get the excess contribution corrected without it being considered a "late" correction. However, the 6% excise tax on Form 5329 will still apply for 2023 since the excess remained in your account past December 31, 2023. The good news is that once you get the corrective distribution, you won't owe the 6% penalty for 2024 and beyond. Also, when working with your plan administrator, make sure they calculate the earnings (or losses) correctly using the "earnings calculation method" - they should track the performance of your specific contributions. If your account lost money during that period, the corrective distribution will actually be less than the $800 you over-contributed. Document everything carefully - keep all correspondence with your plan administrator and make sure you get the proper 1099-R when the distribution is processed. You'll need this for your tax filings.