Prevention and Correction of Overcontributions to Employer-Sponsored Retirement Plans

Introduction

Presenter: Chris Dime, Financial Planner, Edmonds, Washington
Specialization: Retirement planning for individuals.
Focus: Avoiding and rectifying overcontributions to employer-sponsored plans like 401(k), 403(b).

Initial Step: Withdraw excess contribution plus growth (net income attributable).
Deadline: April 15th of the year following the overcontribution year.
Double Taxation: Occurs if corrected before April 15th.
- Corrected W2: Company issues for the overcontribution year.
- 1099-R: Issued in the year of withdrawal, taxable as ordinary income.
Penalty Free: No 10% early withdrawal penalty if corrected by April 15th.
Roth Contributions: No W2 correction: Only growth is taxable.

Post-April 15th: Subject to income taxes on excess and growth.
Early Withdrawal Penalty: Additional 10% penalty still applies.
Not Applicable to Roth IRAs: SECURE Act eliminates this for IRAs but not for employer-sponsored plans.

System Shutdowns: Most plans have cutoff systems, but not all.
Multiple Employers: Changing jobs and maxing out plans at multiple employers can lead to issues.
Control Group Rule: Applies within the same company (e.g., subsidiaries).
After-Tax Contributions: Some companies allow after-tax 401(k) contributions.

Misconception: No income cap for contributing to Roth 401(k) or traditional 401(k).
Relevant to IRAs: Income limits affect IRAs, not 401(k)s.
Self-Employed Issues: Solo 401(k) overfunding often due to not aligning contributions with compensation.
Profit Sharing Limits: Limited to 25% of employee's compensation.

RMDs (Required Minimum Distributions): Must be taken out before rolling over funds from an IRA to a 401(k) or another 401(k).
Aggregation Rule: Separate RMDs for each 401(k) account; can't avoid RMDs by consolidation.
In-Plan Roth Conversions: Must take RMD first before conversions.
Current Employment: RMDs can be deferred if still employed and not more than a 5% owner.