Somebody told me I could be taxed twice on the excess and that confused me.
When you defer your salary into your 401k the amount you defer is not taxed (unless it is a Roth 401k deferral)
once you reach your contribution limit any further deferrals (now considered excess deferrals) are also not taxed when they should have been.
The double taxation is if you don’t correct the excess deferral within the same tax year. i.e. calling HR and telling them “hey I’ve reached my contribution limit and now I’m having excess deferrals. So fix it.” The correction needs to occur before the filing deadline of the tax return of the year you have the excess deferral or April 18 2023 for the 2022 tax year.
if it is corrected before the deadline, the excess shows up as normal W-2 wages and normal withholding happens so it’s taxed as normal. All is good. You’re not double taxed.
if you don’t correct it before the deadline you’ll get assessed tax on the excess as it was supposed to be taxed as normal wages anyway.
you finally get around to correcting the issue. But because it’s now after the filing deadline of the tax year you are now in a new tax year, and so when you pull the money out of your 401k to correct the excess deferral, now it’s treated as a distribution from your 401k and you get a 1099-R and 1099-R distributions are considered income and you have to prove why it should not be taxed with an exception. there isn’t an exception for a 1099-R distribution for excess deferrals. So its considered additional income (that you paid taxes on last year) and it gets taxed again at your ordinary income tax rate.
normally if you’re not 59-1/2 when you take a distribution from your 401k there is a 10% penalty assessed for the early distribution. But there is an exception for excess deferral/contribution distributions so thankfully you get to keep the 10% penalty.
that is the double taxation part of it.
sorry for the complicated explanation. you can blame congress…. all of the rules on taxation and tax deferral and tax advantaged accounts are created by Congress.
so when Congress decides that they want to do away with the IRS and replace it with a national sales tax. Everything about 401k retirement accounts, individual IRA, Roth IRAs and SIMPLEs, Health Savings Accounts, 529s and educational savings accounts and ABLE accounts - All of that goes away…. And it’s going to be a big mess how they’re going to treat all of these formerly tax advantaged accounts that all of us have.
since you’re turning 50 you’ll be able to defer $22,500 of your salary into your 401k in 2023 plus the $7,500 catch-up contribution. The $7,500 catch up doesn’t count against the 2023 $63,000 limit for 401k contributions. so your company contributes their $40,500 you contribute your $22,500 plus your $7,500 catch up for a $70,500 contribution into your 401k for 2023 because you’re 50 or older.