401(k) over max

[winnie]

Client changed jobs right before year end. Had already maxed 401(k) at first job. Thought paperwork would take awhile and elected to contribute with new employer's 401(k). Amazingly, the new employer got his 401(k) contribution in on the last paycheck of the year. Client is working with brokerage firm to have that amount over the limit returned.

Question: I have a w2 with 401(k) over the limit. Client will get that money back. Do I need a corrected W2 from employer? Do I report this on the 1040 like you would an IRA that the client was not eligible to make, with all the explanations about return before due date of the return,....?

Thanks for all the help out there. I continue to learn something new everyday!

[fliszt]

I've had this happen

many times. What I've done is: I go ahead and file the return as stated. Tell the client to contact his current employer and explain what has happened. Then the next year the client gets a 1099R with a distribution code 8, return of contribution taxable in 2007. I'm looking at one right now.

[winnie]

I am not clear

I understand the next year part. This year, I have a w-2 that reduces his taxable income. Usually in the second year the 1099 would come with something like a code P, that says it was taxable in prior year.

Will you include anything in income this year for the excess contribution?

[fliszt]

No I wouldn't.

Enter the W2 just as is. This year, the code P is for the contribution in year 2006 and code 8 is for the contribution in year 2007. Next year (2008 taxes) the codes will change, but some code will refer to the contribution in year 2007. So, just go ahead and prepare the taxes as you normally would. When he/she comes back to you next year they will have a 1099R with some code referring to the excess contribuiton in 2007. (But make sure the client tells his HR department) (this year)

[winnie]

Thanks, Larry