Today TaxMama® hears from Geri in the TaxQuips Forum with this interesting question. “I had two jobs this year. Job 1, I put in the maximum of $16,500 in my 401(k); then in job 2, I put in an additional $6,000. I am under 50 years of age. I now realize I put in more than the maximum contribution allowed. Do I need to take this out by April 17th? Will I still get a penalty on this?”
That is fabulous! I love it when someone is frugal enough to save so much of their money. But, yes, you have over-contributed.
What to do? Yes, remove the funds IMMEDIATELY.
Here’s what IRS says. Hey, it’s actually pretty clear!
Excess withdrawn by April 15. If you withdraw the excess deferral for 2011 by April 15, 2012, it is includable in your gross income for 2011, but not for 2012. The April 15 date is not tied to the due date for your return and is not extended until April17, 2012. However, any income earned on the excess deferral taken out is taxable in the tax year in which it is taken out. The distribution is not subject to the additional 10% tax on early distributions.
So withdraw the funds NOW. Add the income to your 2011 wages.
In 2012 report the earnings on the 401k funds, if any. And don’t pay the 10% early withdrawal fees. Wow, who knew it would be this simple?
And remember, you can find answers to all kinds of questions about excess contributions and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
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