Highly Compensated Employee - Tax related.

[Guest Rampi]

Hi,

I contributed $10500 to my 401K for the year 2000. I just got to know that I am considered as a highly compensated employee and that I can contribute only $7000 to the 401K. In essence my employer said that I will be getting back $3500 and I need to show it as a part of my 2000 income.

Now I know that I need to pay tax on that $3500. Do I need to show this as extra income for year 2000 and pay the tax with the 2000 returns? Or do I need to wait for IRS to let inform me? Basically I want to know how best I can handle this.

Also can I open an IRA and roll this $3500 over to that?

Ram

[Guest S FISCHER]

If the $3500 was removed from the trust by March 15th then you would take it into income for the year 2000 and report it on your 2000 tax return. You definately don't want to wait for the IRS to tell you. You can contribute the $3500 to an IRA but you can't take the deduction for it. If you meet the AGI requirements you could consider contributing a portion of the $3500 to a Roth IRA. You should consult a tax professional for your best approach.

[QDROphile]

You can add $3500 to an IRA if you can attribute the amount to two years ($2000 maximum per year). For example, if you have no IRA contributions for 2000 or 2001 and contribute to the IRA by April 15, 2001, you could attribute $2000 to 2000 and $1500 to 2001.

The IRA contributions have nothing to do with the 401(k) plan. You can do the same thing with any cash that you have available to you.

Nothing said about eligibility for Roth IRA or deduction. We can be relatively certain that you cannot deduct an IRA contribution in 2000 if your status as a highly compensated employee is based on your income. Congratulations.

[Guest Kevin Plymyer]

Another item that is sometimes overlooked when discussing the returns is the market earnings. The recordkeeper must calculate the gain/(loss) on this money and return those funds as well. Considering the market performance over the last year, it will most likely be a loss. The earnings on the return is taxable in the year the return is made, this being 2001.

[Richard Anderson]

Gains or losses must be calculated and returned along with the excess contribution or excess aggregate contribution, but those gains or losses are taxable in the same year as the excess contribution or excess aggregate contribution. So, if distributed by 3/15/2001 in a calendar year plan, the excess and the gain or loss are includible in income for 2000. If distributed after 3/15/01, both the excess and the gain or loss would be taxable in the year of distribution.