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SIMPLE IRA - setup mistake


Guest Emiman
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Guest Emiman

We have a client that came to us in May to set up a brand new 401(k) plan. However, when they came to us they already made a SIMPLE IRA contribution for the month of April because their broker gave them wrong information (he told them the SIMPLE IRA and 401(k) are one in the same).

To make a long story short, they wanted a 401(k) all along - can this one payroll deduction (the employer contribution for this deduction also went in) be backed out, correct the W-2's, so the end result for 2004 is a 401(k) and the SIMPLE IRA did not exist? The account where the SIMPLE was established is the same fund company where the 401(k) will be established. The fund company doesn't know what to do with the 1099-R coding for the way the client would like to see this happen.

I understand the 2 year rule on distributions from a SIMPLE IRA and the SIMPLE can be the only plan for the year. My hope is that there would be a mistake of fact, or plan administrator error on the setup that would allow an exception.

Any help is greatly appreciated.

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I agree that no 1099-R reporting is required. The amounts contributed should be reported in boxes 1, 3, and 5 of Form W-2. The "excess" amounts in the SIMPLE-IRA should be removed (adjusted for gain/loss) by participants before the due date under IRC 408(d) to avoid double taxation that might result if corrected later under IRC 408(d)(5) AND to avoid the 10 percent nondeductible contribution penalty. Either way, the 6 percent penalty does not appear to apply.

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Derelict, Gary,

I agree the employer would not issue a 1099-R. But wouldn’t you agree that one should be issued by the Fund Company to report the return of excess? The excess amount + earnings in Box 1 and only earnings in Box 2a?

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Appelby,

Absolutely (upon distribution). However, in the case of a section 408(d)(5) correction (after return due date), wouldn't box 2a have to be the same as box 1? Double taxation yes, but it doesn't seem like 6 percent penalty applies (in the case of a SIMPLE IRA).

BTW, Delelict, it might be better to say that the SIMPLE IRA did exist--it was established/adopted and contributions were made (although it never satisfied the exclusive plan requirement).

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