EOY 401K overpayment dispustment

What is the name of your state? Maryland

Hello,

I was just notified today, 2/16/07, that I will be dispursed a check for about $4200 in 401k overpayment due to being a high compensated employee in my company. I have already filed my taxes for last year and I really dont want to get taked on this amount. Is there a way to invest these funds in another tax defered medium such as a ROTH IRA or alike? This was retirement money and I really dont want to be taxed on these funds. Please let me know my options. Another note is that the 401k company will only cut a check back to me to refund the overpayment. How can it be invested to be tax defered without any legalities from the IRS?

Thanks,

MikeWhat is the name of your state?

Assuming the disbursement is correct, there is nothing you can do. It is income and you will need to amend your 2006 tax return. If you are in fact a highly compensated employee who is covered by a retirement plan at work (401(k)), you will be well above the limit to make a contribution to a Roth or a deductible contribution to a Traditional IRA. You could make a non-deductible contribution to a traditional IRA, but as the statement implies, it is non-deductible.

If the company did not handle this in that fashion, the excise tax consequences would be severe. Face the facts you have more income and less retirement savings than you planned and will be required to amend your tax return if the error was not adjusted on your W-2.

401k overpayment

So I cant just pay into a IRA the 4000 maximum that is deductible for a ROTH IRA plan and pay taxes on the leftover portion?

No, a Roth IRA is not tax-deductible. Contributions to a Roth are not deducted from taxable income.

For a single person covered by a retirement plan the phase-out for contributions to a Roth is from $50-60000 with no deduction allowd at adjusted Annual Gross Income of $60,000. For a married person filing jointly, the phase-out is between $75,000 and $85,000. A "highly compensated individual"'s adjusted AGI is most probably above those amounts.

(Roth's are not deductible, the earnings on the amount contributed are tax free. A non-deductible Traditional IRA will have the earnings be tax-deferred.)

tranquility, your first paragraph is about AGI limits for deductable contributions to a traditional IRA when covered by an employer's plan, not a Roth. I imagine the OP is over those limits, so even traditional IRA contributions would be non-deductable.

A single person can contribute the annual limit to a Roth if their income is up to $95k, decreasing to none at $110k. Married filing jointly [or qualifying widow(er)] goes from full contribution at $150k to none at $160k. Roth contributions are not deductable.

The money could be used for non-deductable 2006 and/or 2007 contributions to a traditional IRA (if over Roth limits) and then converted to a Roth IRA in 2010 (special case when no income limit for conversion, and tax on gains spread over 3 yrs). But he would still have to pay tax on that 401(k) overpayment for 2006.

Good catch efflandt! I was careless with limits.