Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question:  My client just realized that she contributed too much to her 403b plan in 2012.  What should she do?

Answer:  The IRS website has information about correcting an excess contribution to a 403b tax sheltered annuity:

Correction of excess deferrals during year.   If you have excess deferrals for a year, a corrective distribution may be made only if both of the following conditions are satisfied.

• You or your employer designate the distribution as an excess deferral to the extent you have excess deferrals for the year.
• The correcting distribution is made after the date on which the excess deferral was made.

Correction of excess deferrals after the year.   If you have excess deferrals for a year, you may receive a corrective distribution of the excess deferral no later than April 15 of the following year. The plan can distribute the excess deferral (and any income allocable to the excess) no later than April 15 of the year following the year the excess deferral was made.

Tax treatment of excess deferrals not attributable to Roth contributions.   If the excess deferral is distributed by April 15, it is included in your income in the year contributed and the earnings on the excess deferral will be taxed in the year distributed.

Tax treatment of excess deferrals attributable to Roth contributions.   For these rules, see Regulations section 1.402(g)-1(e).

Therefore, if the client has the employer (or plan custodian) to distribute the excess deferral (and earnings) prior to April 15, it will cure the excess contribution.  The excess contribution would be included in income for 2012, and the earnings withdrawn will be included in income in 2013.

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