Although I had the idea last year to contribute enough for my 2017 401k to obtain the match my company provides, I decided against it since I didn’t want to mess anything up w/ my taxes.
Fast forward a few months and I notice something strange when my Fidelity 401k shows a contribution on Jan 2. This clearly came out of my final 2017 paycheck. I looked at my paycheck and confirmed this — my employer made my contribution in 2017, even though I told them not to start contributing to 2018.
Now, the easiest and likely smartest thing to do would be to tell them to just fix this error and have me pay taxes on the $2818.75 for 2017. But – then I’d lose the $1277.69 “match” that just showed up in my account, which is clearly the amount I was eligible for given my tenure at the company in 2017.
Theoretically (and based on what I’ve read, which is not so clear) I can leave the money in the account, pay tax on the over contribution in 2017 ($2818.75) somehow (I’m not sure if this is on my 2017 or 2018 taxes) and then leave the money in the account to grow, and just pay tax on it again one day when I retire. Yes, that money would be double taxed, but I’d also have an extra $1277.69 in that account to grow for many years, which I’m guessing would make up for the loss in the double taxation.
What isn’t clear is:
- If I ask my employer to remove the excess contribution, will they remove the match? (probably — they should, anyway)
- If I don’t ask my employer to remove the excess contribution, when do I pay taxes on this? It sounds like I can’t do this on my 2017 tax return because I’m supposed to notify my employer then and have the money taken out. So I’d have to wait until after April 15 and then amend the return and pay taxes on this. Will this cost so much to manage with an accountant that it’s not worth it for the $1277.69?
- Why my company deducted the money from my 2017 paycheck to begin with??? (they had me fill out a form when I onboard and I clearly noted no 2017 contributions, and they hadn’t done this for the 4 other pay periods I was paid during my time there before this paycheck.)
- If I leave the money in, is there anything not legal about this, or is it ok as long as I pay taxes twice on it?
- What about the match? Does this count for 2017 or 2018? It showed up 2/1/18 so I am assuming this is a 2018 contribution. Also, do employer matches count towards total $18.5k allowed contribution?
Given I’ve emailed HR a few times with questions and they seem to be purposely avoiding answering my emails, I know I either need to walk into their office and ask for the specific amount to be “reversed” or just leave it in there and deal with the tax consequences.
- The “match” will be worth $5522 in 30 years (at 5% YOY growth)
- After tax, assuming, total 30% tax rate at retirement, that’s $3865 (that I wouldn’t have at all if I didn’t get the match)
- But, assuming same tax rate now and at retirement, I’ll have to pay $845 now and then tax at retirement on the total amount…
- So that’s $1973 invested now after taxes in 401k…
- Or $8527 taxed at 30% = $2558 (vs at 15% capital gains) / $1279 = $1278 LOSS but with a $5522 GAIN or $4243 for leaving $ in the account??? At little less, of course, if taxes are higher now or at retirement.
What do you think I should do? It seems like the accidental over contribution to my account could be worth $4000-ish more in 30 years.