Too Rich for a 401(k)?
If you are a highly compensated employee and your employer returned some of the money you contributed to a 401(k), you'll have to report that as income on your tax return.

This is the time of year a lot of readers are confused by what I call "boomerang 401(k) contributions." This happens when company retirement plans kick out some of the contributions made during the previous year by highly compensated employees -- generally those who made more than $100,000 in 2007.
Such corrective distributions are required if the plan discovers that highly paid employees contributed too much of their salaries compared with the amount contributed by lower-paid workers.
This test is required by Congress to prevent the tax benefits of 401(k)s from going disproportionately to higher-paids. Because the test can't be completed until after the plan year closes, the checks for any excess contributions are mailed out after January 1.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But how to do you report that money on your tax return? It depends on the timing.
If a plan makes such a corrective distribution by March 15, then you report it as part of your 2007 salary -- even though it means reporting more salary than is shown on your W-2. After all, the W-2 amount was set assuming all the 401(k) money you contributed would avoid tax. The corrective distribution retroactively reduces the amount in the tax shelter and hikes your taxable pay.
If the company makes the payout after March 15, it counts as 2008 salary.
Oh, yeah: If you filed your 2007 return before you got a corrective distribution -- and you got the money by March 15 -- you're supposed to file an amended return using Form 1040X to report and pay tax on the extra money.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
Aging: The Overlooked Risk Factor
Sponsored Elder care is a personal and financial vulnerability many people fail to plan for.
-
AI vs the Stock Market: How Did Alphabet, Nike and Industrial Stocks Perform in June?
AI is a new tool to help investors analyze data, but can it beat the stock market? Here's how a chatbot's stock picks fared in June.
-
Retire in the Bahamas With These Three Tax Benefits
Retirement Taxes Retirement in the Bahamas may be worth considering for high-net-worth individuals who hate paying taxes on income and capital gains.
-
Retirees: Don’t Miss These Valuable State Tax Breaks in 2025
Retirement Planning Selecting the right state for retirement can significantly impact your financial well-being.
-
U.S. Treasury to Eliminate Paper Checks: What It Means for Tax Refunds, Social Security
Treasury President Trump signed an executive order forcing the federal government to phase out paper check disbursements by the fall.
-
Tax-Deductible Home Improvements for Retirement in 2025
Retirement Taxes Your aging-in-place plan could benefit from the medical expense tax deduction. But watch out for capital gains and property taxes.
-
You Don’t Want to Retire in Portugal: Here Are Three Tax Reasons Why
Retirement Taxes With the NHR benefit retiring and pension taxes increasing, you might rethink your retirement plans in Portugal.
-
Retire in Costa Rica With These Three Tax Benefits
Retirement Taxes Costa Rica may be a good place for retirement if you like the low cost of living and savings for your heirs.
-
States That Won't Tax Your Retirement Income in 2025
Retirement Taxes Several states don’t tax Social Security benefits, 401(k)s, IRAs, and pensions. But you may still have to pay state taxes on some incomes.
-
Downsize in Retirement With 2025 Tax Benefits: Three Key Strategies
Retirement Taxes Downsizing retirees may benefit from tax savings, lower utility bills, and freed-up income. But could a new presidency impact your home sale?