Assets in wrong type of account

[jane123]

Client contacted his broker to establish a 401(k) plan. The broker gave him an IRA adoption agreement to complete. The broker says it is his mistake. The assets have been in the traditional IRA since 2003.

Now the client and the broker wants adjust all activity and assets from the IRA to the 401(k) plan.

Is this a correction process that is allowed? If is there not a deadline of the next year-end( the year end after the year that the mistake was made.?

Thanks for your help

[mbozek]

Jane: You need to review the following issues with your client and his tax advisor:

If the client did not adopt a 401k plan, e.g, sign documents for such a plan by the end of 03 tax year then no 401k deductions are permitted for the contributions because no plan was in existance for 03 or 04. The client would need to amend the tax returns to eliminate the contributions and pay the back taxes and interest.

If client adopted an IRA and signed the custodial agreement then a deduction for IRA contributions is permitted for each year contributions were made and the 03 return needs to be amended. Excess contributions from 03 will be subject to annual 6% excess contribution tax until contributions are withdrawn. 04 contributions can be withdrawn without penalty before the 04 tax return is filed.

If the client has not filed his 04 tax return he can establish a SEP for 04 by date for filing return with extensions and deduct up to 25% of comp (20% if self employed) by contributing the excess withdrawals from the IRA.

Client can establish 401k for 05.

If your client does not have a tax advisor he need to retain one to file the necessary forms and amend the prior tax returns.