401(k) excess contribution - how to handle

I changed job this year and did not realize that I have to make sure that I do not contribute more than 15500, so I am over by $5000. What are my options , can I just keep it in my 401(k) and pay some penalty etc ( ie no tax benefit etc) or I have to get a distribution of excess contribution? I have already converted the previous employer's 401K into a rollover IRA.

I searched this forum, and could not find anything. If its already answered, I will appreciate pointer to previous discussion.

Thanks for any help

DANGER DANGER DANGER ... CODE RED ALERT. Remove the Excess Contributions immediately!! INSIST that it be completed prior to Dec 31st.

netguru253 said: I changed job this year and did not realize that I have to make sure that I do not contribute more than 15500, so I am over by $5000. What are my options , can I just keep it in my 401(k) and pay some penalty etc ( ie no tax benefit etc) or I have to get a distribution of excess contribution? I have already converted the previous employer's 401K into a rollover IRA.

I searched this forum, and could not find anything. If its already answered, I will appreciate pointer to previous discussion.

Thanks for any help

Archived thread.

Overinvesting in a Roth IRA. Although this article is about Roth IRAs, the same rules apply.

Since you already rolled the first employer's 401k into an IRA, your only option for a correction (if you want to make one) is from the second employer.

Your options:
1) Do nothing. In this case, you will have to add the $5000 to line 7 (wages) of your Form 1040 and pay tax on it. The advantage of this option is that you will get to keep your earnings and matching contributions in the 401k. The disadvantage is that you will have to pay taxes on the $5000 both now and when you withdraw it after you retire.

2) See if your employer can designate the extra $5000 as an after-tax contribution. Most employer plans don't have this option, but it doesn't hurt to ask. Advantage: You won't pay tax on the $5000 when you withdraw it and get to keep earnings and matching funds in your 401k. Disadvantage: You'll pay tax this year.

3) Ask your employer to give you a corrective distribution of the $5000 PLUS EARNINGS by April 15th. Your employer is not obligated to honor your request. Advantage: You won't pay taxes on the $5000 twice. Disadvantage: You have to withdraw the earnings and forfeit any matches and you will have to pay tax on both the $5000 and the earnings this year. Notice: Do NOT do this after April 15th. If you can't get the corrective distribution done by April 15th, you will be better off just leaving the money in your 401k.

You may find several places on the web that say there will be a penalty every year until you withdraw the extra $5000 from the 401k. The people that say this are confusing the 6% excess contribution penalty on IRAs with the 401k rules. The excess contribution penalty does not apply to a 401k. The only "penalty" is that the extra $5000 will be taxable this year but still considered before-tax money in your 401k.

I didnt realize you could over contribute. This may be a GOOD thing for my situation.

Right now I am in a LOW tax bracket so the initial tax on the excess money wont bother me.

I plan on rolling over my 401k into my Roth in following years when I go back to medical school and am in a ZERO tax bracket so the second tax wont hurt me really either.

But I want to secure my money into IRAs to protect it from creditors/BK/Divorce, and secure as much as possible before I get out of medical school where I will be in a high liability position. Im trying to get $100k in a ROTH IRA by age 30 and the only way I can really do this in my current position is if I overcontribute.

frootmall said:
And, by the way, putting your money in a 401k or IRA will not protect it against divorce settlements.

My understanding is that a divorce in many states just splits all money that you earn AFTER the marriage takes place. So if my entire lifetime IRA contributions were placed before the marriage, I cant imagine how my future ex-wife could sue for that. At the very least if its in the IRA she wont be able to spend it while I am temporarily married to her.