401k Contributions sent to IRA Account
Have a recently new client who unbeknownst to me set up an account at Scottrade which he thought was set-up as a Self-Directed 401k, but was actually established as a Rollover IRA. His accountant/employer was withholding the maximum allowed (under 50) and sending the funds to the IRA. Obviously, he over-contributed to the IRA. Can this be corrected so the IRA contributions are backed out and the funds are redirected into a properly established 401k? Any thoughts or suggestions would be greatly appreciated.
Permalink Submitted by Alan Spross on Fri, 2012-11-30 20:55
He would only set up his own 401k if he was self employed. Otherwise, a 401k plan is established by the employer, so it’s not clear how this arrangement was devised. Does the employer even have a 401k?
The employer will have to report any 401k deferrals on the W-2, and if the funds did not go into a 401k to begin with, the employer should not be reporting them as such and his taxable income will be increased by 17k. Meanwhile the IRA custodian will code the contributions either as rollovers or regular IRA contributions. If the contributions were being made by payroll deduction, they would be regular IRA contributions and there would be an excess IRA regular contribution of 12k plus whatever other IRA contributions he made elsewhere. Whatever amount the client wishes can be returned to him as an excess contribution (with earnings allocated to the contributions).
You indicated his employer is an accountant??? You would not expect major errors by an accountant. Perhaps you should call the accountant and get an explanation of what happened here, since these developments do not add up and the client may be confused. It cannot be corrected anyway without an understanding of what went wrong and certain corrective actions by employer, employee and IRA custodian.