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Tax reporting excess contribution - 401(k) / IRA rollover

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What is the tax reporting on an excess pre-tax deferral that happened in a 401(k) for calendar year and plan year 2019, but was distributed in April of 2020 from a rollover IRA account? 

Plan trustee sends a corrected 2019 1099-R in April 2020 with the lower/corrected amount. For example, $40,000, but excess was $10,000, so the corrected 1099-R shows $30,000 on the corrected 2019 1099-R. The IRA custodian reports a 2020 1099-R with a code 1, so the funds are subject to an early distribution penalty as participant is under 59.5?

Any help to explain how the plan should have reported and participants should have handled with 2019/2020 ind taxes is much appreciated.

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C Williams, if I understand/guess your timeline correctly, the distribution and rollover were in 2019, and the excess was withdrawn by the IRA owner before his/her 2019 1040 filing deadline in 2020, right? In that case, see IRC sec. 408(d)(4) and the 1099-R instructions for Code P. I think what IRS wants the person to do is not claim the excess as a rollover on their 1040 (e.g., the individual should have shown on his/her 1040 a rollover of 30k, not 40k), which makes the excess taxable in the year of distribution. Then the distribution from the IRA is not included in income for the distribution year (here, 2020), so no 72(t) or 4973 penalty, or second federal income tax, would apply.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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