Reporting earnings on excess 401(k) deferral

You must have read something wrong. The earnings are also taxable in 2006 and go on line 7 of the 1040. See the instructions for the 1040 and IRS Publication 525.

-- Phil Marti Clarksburg, MD

I'll definitely have to check on that. One of the papers that accompanied the check (from Fidelity) includes the following text: Return of Excess Distribution Description

Please keep this report for your records. It has been determined that you made an excess deferral to the above referenced retirement plan in 2006. Under IRS regulations, the excess deferral must be returned to you along with related earnings. The full amount of the excess deferral is taxable to you in 2006 and the earnings, if any, are taxable to you in 2007. If you had a gain on the excess deferral, you will receive two IRS Forms 1099-R reflecting these corrective distributions in January 2008.

Your excess deferral amount is $XXX.XX and your earnings amount is $XX.XX.

I'm pretty sure that I didn't read that wrong. :-)

-- ============================================================Ian Pilcher snipped-for-privacy@comcast.net ============================================================

Responding again after reviewing Publication 525...

I was under the same impression (that earnings were taxable in the same year as the excess deferrals) until I received the distribution check. After looking at Publication 525, however, it looks like Fidelity is correct. Page 9 of Publication 525 states, "Any income on the excess deferral taken out is taxable in the year in which you take it out." That seems pretty clear, but it doesn't answer the question of how the income should be reported -- as interest/dividends/capital gains or just included in the "Wages, salaries, tips, etc." line of the 1040.

-- ============================================================Ian Pilcher snipped-for-privacy@comcast.net ============================================================

.... unless, of course, you scroll down a little bit. (Where it clearly states that the earnings on the excess contribution are reported on the "Wages, salaries, tips, etc." line of your 1040. That Pilcher guy must be a real idiot!

-- ============================================================Ian Pilcher snipped-for-privacy@comcast.net ============================================================