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<< In 1999 I had two employers and ended up contributing more than $10,000 to the combined 401ks. Neither employer is willing to return the excess so I am thinking about moving the money from the employer I quit into a self directed IRA. In moving that money, I intend to take a distribution of the amount over $10,000 and report that amount as earned income. Since neither employer will cooperate and do it the right way, is the solution I have proposed the only one? >>

The way I read page 17 of IRS Pub 575, that won't work. (I'll welcome correction.) Neither plan is required to refund the excess. You are required to include the excess as wages on your 1999 1040. You'll end up paying tax twice on the excess, because when it comes out of the 401(k) as a taxable distribution, this previously-taxed amount will again be a taxable distribution.

If you take a distribution now as part of a rollover, you'll still have to include the excess as wages AND you'll have a taxable distribution subject to the premature distribution penalty.

I'd suggest you reconfirm with your present employer (where the excess deferral was made) that the plan doesn't allow the refund of excess deferrals.

TMF ExRO
Phil Marti
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