Do You Have to Report 401(k) on Your Tax Return?

Understanding how to report 401(k) contributions on your tax return is essential for accurate financial planning and compliance. Different types of 401(k) plans, such as traditional pre-tax and Roth accounts, have distinct tax implications that can significantly impact your overall tax liability.

This article explores how to report various components of a 401(k) plan on your tax return, including contributions, employer matches, rollovers, and distributions.

Pre-Tax 401(k) Contributions

Pre-tax 401(k) contributions are deducted from your paycheck before taxes, reducing your taxable income. For example, if you earn $70,000 annually and contribute $10,000 to your pre-tax 401(k), your taxable income decreases to $60,000, providing tax savings, particularly for those in higher tax brackets.

The IRS sets annual limits on 401(k) contributions. For 2024, the limit is $23,000 for individuals under 50, with an additional $7,500 catch-up contribution for those aged 50 and above. Exceeding these limits results in a 6% excise tax on the excess amount, according to IRS Code Section 4973.

These contributions are not included in your gross income on your W-2 form and are reported in Box 12 with a code D, indicating pre-tax deferrals.

Roth 401(k) Contributions

Roth 401(k) contributions are made with after-tax dollars, meaning you pay taxes upfront. While this provides no immediate tax benefit, future withdrawals, including potential investment growth, are generally tax-free if certain conditions are met. This can be beneficial for those expecting to be in a higher tax bracket during retirement.

For 2024, the combined contribution limit for both Roth and traditional 401(k) plans is $23,000, with a $7,500 additional catch-up contribution for those 50 and older. Roth 401(k) contributions are included in your taxable income and reflected on your W-2 form. Their long-term tax advantages can be significant, particularly if your investments perform well.

Employer Contributions

Employer contributions, such as matching or profit-sharing, boost retirement savings at no additional cost to employees. For example, an employer might match 50% of contributions up to 6% of an employee’s salary. While employee contributions are subject to annual limits, employer contributions do not count toward these limits. However, the combined total of employee and employer contributions cannot exceed $66,000 or 100% of the employee’s compensation for 2024, whichever is lower.

Employer contributions are tax-deductible for the employer and are not immediately taxable to the employee. Instead, taxes are deferred until withdrawal during retirement. These contributions are reported in Box 12 of the employee’s W-2 form but do not affect the employee’s taxable income in the year they are made. The vesting schedule determines when employees gain full ownership of these contributions.

Rollovers

A 401(k) rollover transfers funds from one retirement account to another, such as moving a 401(k) balance to an Individual Retirement Account (IRA). This is often done when changing jobs or seeking more diverse investment options.

The IRS allows two methods: direct and indirect rollovers. Direct rollovers transfer funds directly between institutions, avoiding immediate tax consequences. Indirect rollovers involve the account holder receiving the funds before depositing them into the new account within 60 days. Missing this deadline results in the distribution being taxed and potentially subject to a 10% early withdrawal penalty if under age 59½.

Early Distributions

Taking distributions from a 401(k) plan before age 59½ usually incurs a 10% early withdrawal penalty in addition to ordinary income tax. This penalty discourages premature withdrawals. However, exceptions exist for specific circumstances, such as certain medical expenses, qualified higher education costs, and first-time home purchases.

The distributed amount is added to your taxable income for the year, potentially increasing your tax bracket. To reduce the impact, consider spreading distributions over multiple years or exploring alternative funding sources. Consulting a tax professional can help ensure compliance with IRS rules and minimize penalties.

Excess Contributions

Excess contributions occur when contributions exceed the IRS annual limits. To avoid a 6% excise tax, the excess must be withdrawn by April 15 of the following year, in line with IRS Code Section 4973.

To correct excess contributions, notify the plan administrator, who will arrange the distribution of the excess amount and any associated earnings. The earnings are taxable in the year they are withdrawn, while the excess contributions are taxed in the year they were made. Monitoring contributions throughout the year helps prevent exceeding limits. Employers can assist by providing tools and guidance to track contributions effectively.