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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?

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neubert
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2 Answers2

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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.

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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.

minou
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