Hi,
My wife got RIFd from a job earlier this year, she saw it coming a mile away so decided to max out her 401k for the year, thinking she’d go for a bit without a job.
She got lucky and found a new job immediately with an attractive 401k match, and ended up contributing to this new plan as well.
So, the question is what happens at tax time when she is over on both plans combined, can she fix this by simply just paying taxes on the overage, or does she need the unwind the payments before end of year and lose the employer match on all the overage? Can she take a distribution? Can she convert to a different plan?
Both plans in fidelity, both plans are fully vested if that matters.
Let me know if any details are missing?
Thanks !!
Posted by thisishard1001
3 Comments
Despite the attractiveness of the matching, it should be fixed with her new employer, preferably before the end of the year.
1. Contact her employer and stop the contributions immediately. Remember to restart after January 1, 2026.
2. Have the excess contributions distributed out as soon as possible but no later than April 15, 2026 in order to avoid penalties.
3. The distribution will need to be included in your taxable income for 2025 (a 1099-R should be issued).
Effectively the above fixes the over-contribution and nets to $0 tax impact. The new employer reduces taxable wages by the excess contribution and then she picks up the excess contribution as taxable income by reporting the 1099-R.
This happens on occasion. There is a corrective window to make a withdrawal of excess contribution, just has to be done before April 15 of next year. Simply call up Fidelity and talk to them. In theory, they should be able to make the withdrawal from the former employers plan that may not have been subject to a match, and you should be able to get the maximum match possible given when she was and was not employed. For example, if you contributed 10%, when the match was only up to 3%, you may be able to withdraw the excess percentage of elective employee deferrals without sacrificing the match you received at the previous employer. Again, just call Fidelity and talk it through with one of their retirement specialists. And be sure to read the IRS circular on this subject:
https://www.irs.gov/retirement-plans/consequences-to-a-participant-who-makes-excess-deferrals-to-a-401k-plan