Excess deferral

Excess Deferral

Contributions to an IRA, 401(k), or other tax-deferred account over and above the limits on what may be deferred. Most plans place limits on how much can be contributed to the account each year and written off of one's taxable income. If one contributes too much, one runs the risk of paying taxes on the excess deferral in the year it is contributed as well as the year it is distributed after retirement. One may avoid this if one requests a refund of the excess deferral in the same tax year. If one does this, one only owes taxes for the current year.

Excess deferral.

An excess deferral is a contribution that exceeds the tax-deductible amount you can add to an employer sponsored retirement plan in a particular year.

Your plan may allow excess deferrals to be distributed to you. If so, you must make the request by April 15 of the following year. If the amount and any earnings are returned to you by that date, the excess is taxed in the year it went into the plan and the earnings are taxed in the year they are distributed. There's no 10% tax penalty for early withdrawal.

For example, if you contribute too much in 2008, you must request distribution by April 15, 2009. If the distribution is made by April 15, 2009, you report the excess as income for 2008 and the earnings as income for 2009.

If the distribution is not made before the deadline, the excess is taxed in the year it was made and also when it is distributed.