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Investing/Strategies / Retirement Investing
|Subject: Re: Exceeded 401k limit.||Date: 1/15/2006 6:34 PM|
|Author: vkg||Number: 49408 of 74001|
Since you have already rolled over the first 401K, contact the administrator for the current 401K. Explain that you overcontributed and need to take a distribution to correct the problem. Hopefully, they will be helpful and not try to make you withdraw the overcontribution from the other plan.
The overcontribution and the income associated with the overcontributions have to be promply distributed to avoid penalties. The administrator will calculate the appropriate amount of the distribution. The sooner you make the request the better. Administrators can be overloaded as April 15th approaches. If the distribution does not occur by April 15th, request an extention.
Since the distribution will occur in 2006, the 1099-R is technically a 2006 document and is not required to be issued until January of 2006. Check with the tax board about how to report the over contribution for 2005. I believe, that the over-contribution is added back into 2005 income and the income on the over-contribution will be subject to tax and early withdrawl penalty in 2006. Since it is only the income on the $2,500, the early withdrawl penalty should be fairly small.
Once over-contribution penalties start they can become very nasty. If left to long the contributions can carry an annual penalty and be taxed twice (contribution and distribution years).
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