Reclassify After Tax IRA rollover to IRA


F

Filtman

In Jan/Feb of 2004 my former employer (I quit in 9/2003)
discovered they overpaid my 401K savings plan (for year
2003) by $600. The 401K brokerage informed me that I would
need to declare the income on my 2003 tax return (which I
did) and that I would be getting 1099R forms in 2005 (not
sure why 2005).

At about the same time, I had the brokerage transfer my 401K
savings into an IRA rollover account (within the same
brokerage). The problem is that they mistakenly transferred
the overpaid $600 as an after tax rollover rather then
sending me a check. For 2004 I have no 401K savings plan and
would have liked to use that $600 as part of my $3000 IRA
deduction.

I'm not sure I believe them, but the brokerage is saying
they can't change it now. Is that true or are they just
trying to avoid the extra work? How do I avoid paying taxes
on the $600 again when I retire?

Thanks
 
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P

Phil Marti

Filtman said:
In Jan/Feb of 2004 my former employer (I quit in 9/2003)
discovered they overpaid my 401K savings plan (for year
2003) by $600. The 401K brokerage informed me that I would
need to declare the income on my 2003 tax return (which I
did) and that I would be getting 1099R forms in 2005 (not
sure why 2005).
You'd get a 1099-R for tax year 2004 early in 2005.
At about the same time, I had the brokerage transfer my 401K
savings into an IRA rollover account (within the same
brokerage). The problem is that they mistakenly transferred
the overpaid $600 as an after tax rollover rather then
sending me a check. For 2004 I have no 401K savings plan and
would have liked to use that $600 as part of my $3000 IRA
deduction.

I'm not sure I believe them, but the brokerage is saying
they can't change it now. Is that true or are they just
trying to avoid the extra work? How do I avoid paying taxes
on the $600 again when I retire?
I don't see how they can change it now. You avoid double
taxation by filing Form 8606, part I, for 2004.
 
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A

A.G. Kalman

Filtman said:
In Jan/Feb of 2004 my former employer (I quit in 9/2003)
discovered they overpaid my 401K savings plan (for year
2003) by $600. The 401K brokerage informed me that I would
need to declare the income on my 2003 tax return (which I
did) and that I would be getting 1099R forms in 2005 (not
sure why 2005).

At about the same time, I had the brokerage transfer my 401K
savings into an IRA rollover account (within the same
brokerage). The problem is that they mistakenly transferred
the overpaid $600 as an after tax rollover rather then
sending me a check. For 2004 I have no 401K savings plan and
would have liked to use that $600 as part of my $3000 IRA
deduction.

I'm not sure I believe them, but the brokerage is saying
they can't change it now. Is that true or are they just
trying to avoid the extra work? How do I avoid paying taxes
on the $600 again when I retire?
If this was an excess contribution, there probably is no
problem as excess contributions do not have to be
distributed. They can be recharacterized as after-tax
contributions. You have to declare the amount as income. You
state that you did that.

If this was an excess deferral, then there is a problem. An
excess deferral has to be added to income and it has to be
distributed to you with the earnings before the due date of
your tax return. Failure to receive the distribution by the
due date means that you cannot include the amount in your
cost basis for the plan. If you take it out after the due
date, it will be taxed.

An excess contribution is the amount that a highly
compensated employee contributed in excess of the the amount
allowed under the percentage test.

An excess deferral is the amount contributed in excess of
the annual limitation. E.g., $13,000 being the limit for a
401(k) in 2004.

From the facts presented, I can't tell what the $600
represented.
 

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