Dear Fools,My wife started contributing to her 401K plan at work a few years ago. She asked the person at her workplace in charge of the retirement plan to have her put in the maximum allowed. It is my understanding that this is something like 12,000 per year,last year, and 13,000 this year. Her income is not really high, so these amounts areare actually a very high fraction of her salary.Anyway, she ended up contributing about 7,000 last year, well under the 12,000allowed maximum, but a very high percentage of her total income.She was just told by her employer that we are being sent a $1,250 check from her401K plan, because she over-contributed in 2003. According to my wife's employer,she over-contributed even though she only put in 7,000, because the plan hasa maximum allowed percentage-of-income contribution, which she exceeded. (I'm assuming I understanding all this correctly). Apparently this over-contribution wasjust discovered. So now I am wondering what is best to do with this check for $1250 that is supposedto be coming. We wanted to leave it in the 401K, but apparently can't. My understanding is that we will have to pay taxes on it in 2004, plus some sort of penaltyfor over-contributing and/or withdrawing early (since we are much younger than59 years or whatever we would need to be to withdraw from the plan without penalty).We don't so much mind paying our taxes on the $1,250, because we know we have notpayed tax on this income yet. But it is kind of annoying to have to pay penalties, since we don't believe we have ever received any information that would have allowed usto determine that we were over-contributing according to the rules of the plan.Any advice as to how to reduce the tax bite and maximize our contribution to ourretirement would be appreciated.Some background - My wife is planning to stay with this employer a long time. Theyare a local small business. Good people, but maybe not too on-the-ball regardingthe 401K plan. Fidelity manages the plan, we have been happy with them so far.StoppedClock
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