Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
1099-R code "E" to correct a previous mistake
Posted by: bl1488, April 13, 2016 06:43PM
Hello

Does anyone have any experience with the 1099-R box-7 code "E" which means the plan is correcting a previous error?

In 2014 I contributed to a 401K at a former employer. I then moved the funds to a rollover IRA and then to a Roth IRA. I received a 1099-R from the well-known and reputable plan administrator showing all these funds as code "G" and I paid my taxes as expected.

I recently received a corrected 2014 1099-R, which now shows most of the funds as still code "G", but a moderate amount is now reclassified as code "E", which apparently is an IRS program called EPCRS used to correct past errors by the plan administrator.

I am hesitant to start paying for expensive advice as to what if anything I need to do, especially since the underlying sums are not huge. I am tempted to just wait and let the IRS take their copy of the 1099 and tell me what they want me to do (if anything). I have done nothing wrong, and I don't think there is any legal obligation to amend a return absent fraud.

Anyone have any opinions?

Thank you

Re: 1099-R code "E" to correct a previous mistake
Posted by: Alan S., April 13, 2016 08:29PM
You should have received a letter from the plan explaining the type of excess involved here, because Code E can apply to a variety of situations.

Basically, if a rollover from the plan is done before the plan is able to identify the problem, the amount coded E is not eligible for rollover or conversion, and now you have an excess IRA contribution to correct. This is rather messy, and more so because you took the extra step to convert.

To correct this, you would have to amend your 2014 return to reflect a taxable distribution of the E coded amount and the reduced G coded amount. That will produce taxable income on line 16b.

Then you have to deal with the fact that the E coded amount was not eligible for rollover, making it an excess TIRA contribution.

Was your Roth conversion for the entire amount in all your TIRA accounts? Do you have other TIRA accounts beside the rollover IRA, and did you convert the entire rollover IRA? Need this info to determine if you will have to recharacterize the E coded amount of your conversion back to the TIRA before requesting the removal of the excess contribution.

Note that since the E coded amount is taxable for 2014, it will not be taxable again when distributed from the IRA, although if there are IRA earnings on that amount, the earnings distributed will be taxable.

There is no 10% penalty on the line 16b E coded taxable amount, just regular taxes. Of course, if you need to do a partial recharacterization of the conversion, you will get a tax refund for that portion. If the E coded amount is small, this will not be costly, but it WILL be a hassle. Ignoring it risks additional penalties from the IRS if an when they contact you.

Any chance your total contributions to the plan in 2014 exceeded 52k? That could be the problem, but they should have explained what caused the problem.

Re: 1099-R code "E" to correct a previous mistake
Posted by: bl1488, April 13, 2016 10:04PM
Hello

thank you for the prompt and detailed reply. You obviously understand the subject quite well.

I had some email and telephone conversations about this issue with my former employer. I am not sure I ever received an official letter about it.

Basically I worked for them until the summer of 2013. In Q1 of 2014 they paid out bonuses based upon 2013 earnings, and because I had left in good standing I was eligible for a pro-rated bonus. While I was working I had selected to have a portion of my salary and bonuses diverted to my 401K, and they did this with the 2014-Q1 bonus payment. Then late in 2015 they decided that because I was not an active employee in 2014 I was ineligible to contribute to the 401K plan. If the money was still in the 401K they would have backed it out and sent it to me, but because it was no longer in the 401K and because I had done a Roth conversion with an amount greater than the amount in question they instead handled it with an amended 1099-R.

I never talked directly to the attorney for the plan administrator, but somehow I have the impression that they thought that because I had already paid tax on the funds in the same year via the Roth conversion that there would be less hassle and less need to file an amended return and pay more tax.

My Roth conversion was not for the entire amount of my TIRA balance, so I guess I could deem the Roth conversion took place with funds that were legitimately in the TIRA, and deem the funds that I was mistakenly allowed to put into the 401K to be now present in the TIRA, which would be one less step to undo.

If my employer had not put the funds into the 401k but instead simply paid them to me in cash, then I could have used them to make a TIRA contribution and got to the same place I am now. The problem is that the deadline for making TIRA contributions for tax year 2014 has of course long since passed. Ideally there would be some way to get an extension of the 2014 IRA contribution deadline since I got into this mess through no fault of my own.

Any idea what penalties I might face if I wait for the IRS to contact me? I generally try to stay honest, but I feel frustrated by the headache involved considering I did nothing wrong. Presumably if I wait for the IRS then they will tell me exactly what to do, and I would not need to pay someone to figure this all out.

Thanks again for your help!


Re: 1099-R code "E" to correct a previous mistake
Posted by: Alan S., April 14, 2016 03:36AM
I agree that if the amount of your conversion plus the E coded 1099R is less than the value of the IRA at the time of the conversion, then the conversion need not be involved in correcting the excess TIRA contribution.

The amount of the excess contribution can be reduced if you did not make a TIRA contribution or Roth contribution that you were eligible to make. Form 5329 automatically does this if completed properly. The annual 6% excise tax is also reported on this form. Therefore, there are 3 possible years that your IRA excess could be reduced, although you probably do not qualify to deduct these TIRA contributions. The resulting excess amount should be withdrawn before the end of 2016 to eliminate another excise tax for 2016. The distribution of the remaining excess amount should not be taxable since you will have paid the taxes on for the E coded 1099R when you amend the 2014 return. That 1040X would also include the 2014 5329 for the IRA excise tax. If you have already filed 2015, you would also have to amend it for the 2015 5329, and if you can apply any of the excess as non deductible TIRA contribution you need an 8606 to report them.

This is certainly not fair, but it is the only way to report and eliminate the excess IRA contribution. Even though this is basically a clawback contribution, the solution is the same as for the other more common reasons for a revised 1099R. Thousands of highly compensated employees get hit with this every year.

There is a combination of potential penalties the IRS could levy if they detect the error, and there is no statute of limitations for excess IRA contributions, so this could potentially result in many years of 6% excise taxes plus interest.


Re: 1099-R code "E" to correct a previous mistake
Posted by: bl1488, April 14, 2016 05:50AM
You are saying all this like it makes sense to you, but each sentence is taking me 5-10 minutes to fully digest.

I originally thought I was not eligible to make an IRA contribution in 2014 because my employer put a portion of my salary into my 401K and then checked the box on my W-2 that I was a retirement plan participant.

Now that they have retroactively decided that I was not a retirement plan participant, I will need to ask them for an amended W-2 without checking the box that I was a retirement plan participant. Once I have done that, assuming they agree, I should be able to offset the amount of "E" 1099-R income by making a retroactive IRA contribution and then I would owe nothing?

Even if they refuse to update my W-2 (I need to check, but I think they made a 2nd payment to a different retirement plan that they did not undo), can I still use line-10 of form 5329 to make a post-tax IRA contribution?

This isn't fun, but not as bad as I first thought. It is sounding like the amount that will need to be withdrawn from the TIRA is less than $1,000.

It sounds like once I have my form 5329 filled out I will need to contact the plan administrator to actually pull some money out of the TIRA and send it to me as a check. Will there be a different penalty assessed since I am not yet 59 years old?

Re: 1099-R code "E" to correct a previous mistake
Posted by: Alan S., April 14, 2016 05:17PM
The corrected W-2 without the retirement plan box checked may allow you to deduct the IRA contribution, but you cannot be a participant for 2014 in ANY plan. What about the new employer you worked for in 2014? If you were a participant in another plan, then no use in trying to get the former plan W-2 corrected. Here is a summary of the active participant rules: [retirementdictionary.com]

If you cannot deduct the contribution, you can still apply the E coded ineligible rollover as a non deductible contribution to reduce the IRA excess amounts using line 10 of the 5329. Be sure you did not make a Roth contribution for these years or your IRA space will have been used up with no room left for any more contributions. If you end up with a non deductible IRA contribution for any year, you must report that on Form 8606 for that year.

The amount you end up having to distribute from the IRA should not be taxable since you are already taxed due to the E code 1099R, and since there is no earnings calculation because you are beyond the 2014 due date, there is no penalty applied to earnings. You would not ask for a corrective distribution or mention any of this to the IRA Custodian. Just ask for the dollar amount of the final IRA distribution, and that is also applied on line 12 of Form 5329 for the year of the distribution.

The concept here is referred to as "excess due to incorrect rollover information". You can explain all this to the IRS using the space provided in the 1040X for 2014.

Re: 1099-R code "E" to correct a previous mistake
Posted by: bl1488, April 15, 2016 03:33AM
If I am understanding this correctly this is not nearly as bad as I feared.



I found a link
[taxmap.ntis.gov]
taxmap/archive2014/taxmap/pub1
/p17-090.htm#TXMP7128eedf

which includes the paragraph

If an excess contribution in your traditional IRA is the result of a rollover and the excess occurred because the information the plan was required to give you was incorrect, you can withdraw the excess contribution. The limits mentioned above are increased by the amount of the excess that is due to the incorrect information. You will have to amend your return for the year in which the excess occurred to correct the reporting of the rollover amounts in that year. Do not include in your gross income the part of the excess contribution caused by the incorrect information.

My actual numbers are
- 2014 non-deductible IRA contribution (8606-1) $3,391
- 1099-R recently reclassified as code-E $4,149.

As I read it, in general the total of the amount originally contributed to an IRA and the amount retroactively contributed via 5329-10 would need to be less than $6500. However in the case of a plan administrator error, this limit is waived so I am OK with a total of $7,540. This means I can solve the issue with a single amended return for 2014, and the issue does not need to continue into my 2015 and 2016 returns. (I put the filing of my 2015 return on hold pending a complete understanding of this issue.)

There is one other hiccup. I took a large buyout offer from my fortune-100 employer in the summer of 2013 and left the workforce. My only earned income for2014 was the bonus from my former employer. Normally there is a limit that the total amount contributed to an IRA cannot be more than the total of all W-2 earned income, however my W-2 total is less than $7,540.

The spirit of the law would pretty clearly allow this. If my former employer and their plan administrator had originally done this correctly and had not diverted some earned income to my 401K, then the W-2 would have included all the money that is now in the code-E status. However I have observed in life that it is often the letter of the law and not the spirit that counts.

I also discovered today that the attorney for the plan administrator was supposed to send me a cover letter along with the updated 1099-R's providing some kind of information that might be useful, but I only received the 1099R's, not the cover letter. I am attempting to obtain this letter.


Problem almost solved

Re: 1099-R code "E" to correct a previous mistake
Posted by: Alan S., April 15, 2016 10:50PM
Unfortunately, all these provisions do not work exactly the way you indicated.

The paragraph you posted is Sec 408(d)(5)(B) of the tax code. The portion about increasing the statutory deduction limit only operates to increase the amount that you can withdraw without paying taxes under Sec 72.

These provisions are very complex. The E coded 1099R created an excess IRA contribution for that amount. There are 3 possible ways to correct this excess contribution:
1) If the date is still before the due date for removing the excess with earnings, you can do that to eliminate the excess and any excise tax. Earnings will be taxable, but not the excess. That deadline was 10/15/2015 and has passed now.
2) Once that deadline passes, you move on to a different procedure for correction of the excess and the 6% excise tax has been triggered. This involves either distributing the exact excess amount to end the excise taxes (no earnings distributed) or applying the excess as a regular IRA contribution that you are eligible to make, but did not for a year. Waiting for such a year could be expensive because you owe the 6% excise tax for each year you wait to apply the excess amount. The paragraph you posted does NOT provide an additional amount above the contribution limit to apply the excess to, it just increases the amount you can withdraw tax free to eliminate the excess. Normally, you would proceed in whichever manner eliminates the 6% excise taxes sooner.

I may not have your details exactly right,but it appears that 4149 was rolled over to your IRA in 2014 and became an excess contribution which was not removed with earnings by the 10/15/2015 deadline. That triggers a 6% excise tax on 4149 for 2014 on Form 5329. The first year you can apply this for a regular contribution is 2015, not 2014. It is obviously too late to remove it in 2015 as well, but perhaps you can apply all or part of it as a 2015 IRA contribution. If so, the part you can apply may be deductible or not based on 2015 participation in a workplace plan. Either way, if you can apply all or part of it for 2015 on a 2015 5329, there will be no excise tax for 2015 on the applied portion.

Now we are in 2016, so do you still have an excess balance that could not be applied? If so, you can apply it for 2016 and eliminate any 2016 excise tax. If you cannot apply it, you can also eliminate a 2016 excise tax by withdrawing it. The withdrawal will be tax free per Sec 408(d)(5)(B). It probably does not make much difference whether you withdraw or apply it, because you can only apply it by not making a contribution you are eligible to make. It leaves the same amount in your IRA either way.

Note that if you made a 2015 IRA contribution that you wish you did not because you instead wanted to apply the excess to 2015, you can still remove the 2015 contribution with earnings to free up 2015 space to apply the excess and that will eliminate the 6% excise tax for 2015. If you have gains or losses on the 2015 contribution, it can alter this decision (more beneficial to remove it if there is a loss).

This is confusing stuff, so you may well have more questions.

Re: 1099-R code "E" to correct a previous mistake
Posted by: bl1488, April 15, 2016 11:14PM
Ok - I will study this all over again and try to make sense of it again.

My first reaction is anger that this dragged on so long. This problem was first identified on May 8th, 2015, and determined to impact about 40 employees. The lawyers for my former employer and their 401K administrator spent about 6 months trying to decide what to do, and about another 4 months implementing their decision. Based upon what you say, it would have been much less of a mess if they had moved a little faster.

Re: 1099-R code "E" to correct a previous mistake
Posted by: bl1488, April 15, 2016 11:25PM
So one question Alan that you did not answer from my previous post. If the $6,500 per year limit is NOT waived, is the limit of the total of all "earned" W-2 income still apply? If this limit does not apply I can apply $6500-$3391=$3109 to my unused 2014 IRA contribution. Given that my former employer is now saying that the money should have been wages rather than deferred compensation, it would seem logical to treat is as eligible for contribution to an IRA. I would have been allowed to contribute the money to an IRA if the employer had not erroneously diverted it to a 401K in the first place and had instead paid it to me and written a larger W-2.

If I can do this, it reduces the amount to be carried forward and subject to excise tax down to, ironically, $1,040.

Re: 1099-R code "E" to correct a previous mistake
Posted by: Alan S., April 16, 2016 02:13AM
Your IRA contribution for any year is limited to the lesser of your earned income or permitted additional amounts as spousal contributions or the 6500 limit. If your earned income was 3391 in 2014, that is the limit for your contribution whether you make it directly or use it to apply an excess contribution.

But if you check Form 5329, you cannot apply an excess contribution to a year until you have incurred the excise tax for the prior year. Therefore, 2015 is the first year you could use to apply any of the excess as a current year contribution. I do not know what your situation is for 2015, but if you cannot apply your excess in 2015, you should withdraw it before the end of 2016 to eliminate a third year of excise taxes.

This situation is unfortunate, but is more or less typical for many qualified plan contribution errors, many of which are employer errors or IRS Rules which cannot be applied until after the calendar year has ended.

Re: 1099-R code "E" to correct a previous mistake
Posted by: bl1488, April 20, 2016 04:40AM
Hello Alan - can I please ask one more question...


Form 5329 line-11 asks about any withdrawals from traditional IRA's that are included in my taxable income.

If I did a partial Roth conversion (which I did during both 2014 and 2015) - does that count as a "withdrawal from a traditional IRA that is included in my taxable income"? It sure sounds like it to me - the money is no longer in my traditional IRA, and I did pay taxes on it, and I see nothing in the instructions saying that it isn't.

I don't think that would help in my case in 2014 because line-11 only deducts from prior years carry forward, but for 2015 it would solve the whole issue.

Thanks in advance!

Re: 1099-R code "E" to correct a previous mistake
Posted by: Alan S., April 20, 2016 07:29PM
Sorry, but it does not count because a Roth conversion is a two part transaction, a distribution and a rollover. Because it is a rollover, it would shift a contribution you were not allowed to make into another type of IRA. To reduce your excess, you need to take a distribution, but no rollover.

A conversion would actually amount to another step similar to how this excess was moved from your employer plan to your IRA. Shifting an excess amount to another account does not eliminate it, even if the shift involves a tax liability.

Too good to be true, I guess.

Re: 1099-R code "E" to correct a previous mistake
Posted by: bl1488, October 24, 2016 10:11PM
Alan S - are you still there?

You provided me much useful info on this subject earlier this year.

I worked with my CPA (who was not all that familiar with this extremely specialized and relatively unusual type of situation), and got my 2014 return amended and paid my excise tax and interest etc and then filed my 2015 return and treated the accidental 401K contribution as my IRA contribution for 2015. Your advice was very useful.

I plan to send a polite letter to my former employer asking them to compensate me for the expenses they caused - not sure what will come of it.

While I don't know your exact circumstances, you obviously have professional-level training and skills in this area. If you have a favorite charity please let me know and I would be happy to make a donation in appreciation!

Re: 1099-R code "E" to correct a previous mistake
Posted by: Alan S., October 25, 2016 03:32AM
Still here and thanks for your offer. Glad this issue has apparently been concluded, although complete review of 2015 returns has probably not been completed by the IRS.

I appreciate your offer regarding the donation. Feel free to make the donation to YOUR charity of preference.

Regards, Alan

Re: 1099-R code "E" to correct a previous mistake
Posted by: bl1488, June 10, 2017 02:54AM
An update.

I incurred significant costs due to this issue - mostly CPA fees, but also IRS penalties, interest etc. Most of all this was a long-running time sync headache.

After it was over I totaled it all up and sent a demand letter to my former employer, requesting reimbursement of about $4800 in costs. They referred my letter to the legal department where it sat for months and months as these things always do. Eventually they decided to approve a payment for about $1400. I had incurred $1800 in relevant CPA fees, but they capped those at $500. It isn't really satisfactory, but it is time to put this subject behind me and move on.

Thanks again to those who helped!

Re: 1099-R code "E" to correct a previous mistake
Posted by: skitaxq99, September 2, 2017 01:44AM
Hello Alan S. and bl1488,

I'm so glad to finally find this thread. I just encountered a similar situation - maybe a little messy. :-) Your post are very informative and helpful.
Thank you bl1488 for posting the question, and thank you Alan S. for the knowledgeable answers!
I was hesitated to talk to a CPA because as bl1488 experienced, this situation was quite rear, and most CPA might not have experience either.

Compared to bl1488, my situation is not as bad, so I'm wondering if I can have it sorted out here so that I can file the amendment by myself.

Here is my situation:

Oct. 2016 - I left my former employer
Nov. 2016 - rolled over all my 401k with the former employer to my existing Rollover account.
Apr. 2017 - filed 2016 tax return before the deadline of Apr.18th.
June 2017 - I received a letter from my former employer's plan custodian, indicating out of the amount I rolled over, about $500 was taxable because of excess employer match contribution which was found out during their annual testing. so they mailed me a 1099-R correction form with code G and another 1099-R with $500 taxable with code 'E'.

After reading previous posts, my understanding is there are 2 steps: file 2016 amendment, and take out excess contribution. but still have some detail questions I'm not sure, and would like to get your opinions:

1. Since I've already filed my 2016 tax by deadline, and because it's not my fault for missing tax on this taxable excess match contribution, if I file amendment before Oct.15, 2017, I should just be taxed on the excess amount, no other extra penalty, even I owe tax, right?

2. Should I received the correction before my 2016 filing, I can make a distribution and file the excess amount with gain or lost all with my 2016 return, but now it has passed the Apr. deadline, if I take the excess amount out (assume before Oct. 2017), and if there is a lost associated, can I file the lost on the 2016 amendment (to reduce the taxable amount)? If I have to file full excess amount on 2016 amendment, can the associated lost be filed for 2017?

3. Do I have the option to apply the excess amount as 2017 TIRA instead of take it out? right now the amount is sitting in a rollover account, can rollover account consider as TIRA?
If it can be applied, then there is no trouble calculating lost or gain on the excess amount, right?


4. if I take out the excess, I might get another 2017 1099-R form from my existing rollover account company, since it looks like a distribution, do I need file tax again when I file my 2017 return?


5. My impression was taking out a portion of same year contribution within the same tax year would not incur extra tax or penalty, just as if that portion was not contributed, is it correct?
I've already maxed my Roth IRA for 2017, which leaves no room for extra TIRA, but if the 2016 excess can be applied, I'm thinking of taking out of a portion (same amount of the excess) of my 2017 Roth contribution to leave room for the 2016 excess to be applied to avoid cross year gain/lost calculation. is it doable?

Thank you for help, looking forward to hearing from you soon!

Best Regards,
J

Re: 1099-R code "E" to correct a previous mistake
Posted by: Alan S., September 2, 2017 05:25PM
1) 10/15 is your deadline to remove the excess IRA contribution, but you do not necessarily have to file the 2016 1040X by that date. On the 1040X, you will show the 500 as income and also the earnings returned on the excess IRA contribution. The 1099R for the IRA excess contribution removal will not be issued till next January, but will be coded to show 2016 as the year the earnings will be taxable. I don't think the IRS normally charges a late interest underpayment penalty on these small amounts, but on the 1040X you should explain that the excess was not identified until recently.

2) If there is a loss on your IRA excess contribution return, there is no way to deduct that loss because you will not be closing your entire IRA. But you will have no taxable income or 10% penalty if there is a loss. Be sure to request the excess contribution removal from the IRA ASAP and you will have to explain to them why a rollover included an excess amount, and they may not understand this at first.

3) If you do not have the IRA excess returned, you will incur a 6% excise tax for 2016 on Form 5329 ($30). You might be able to apply the excess to 2017, but perhaps cannot deduct it and if not you would have to file an 8606 which would be a continuing hassle unless you ALREADY have basis in your TIRA. You are correct that there would be no earnings returned if you can apply the excess as a regular 2017 TIRA contribution, and you would not have to contact the IRA custodian. But better check to see if your modified AGI is low enough to allow you to deduct that 500 in 2017.

4)See above. You will get a 1099R from the IRA custodian if you remove the 2016 excess, but the earnings will be taxable in 2016 and should be included on your 2016 1040X as well as the 10% penalty on the earnings. This will not affect your 2017 return. You will know what the earnings are when you receive the distribution, as the earnings will be the amount you receive exceeds the $500 excess.

5) No. If you remove an excess up to the due date, any earnings is always taxable and possibly subject to penalty. But if you remove an excess after the due date (after 10/15), that is a regular distribution and no earnings come out. You would just ask for a 500 distribution. The 500 needs to come out before 12/31 or you incur a second year of 6% excise taxes. Both this option and the apply as 2017 contribution are done on Form 5329, so you actually have 3 options to pursue. Since the excess is only 500, what could your earnings be? That depends on the % gain of the entire rollover IRA from Nov, 2016 to now. Before choosing an option, you should make your own estimate of the amount of gain, perhaps using the 11/2016 statement and the 8/2017 statement. If your account is up 15%, then your earnings would be $75. I doubt that you would have a loss.

If you have already made a full Roth contribution for 2017, then you would have to remove 500 of that contribution and pay taxes on those earnings (but on 2017 return). Otherwise, there is no room to apply the 2016 excess to 2017. So this does not save you any work. In making the choice, what is the key? The least possible cost may be involve more hassle, and since the excess is only 500, you would probably go with the least hassle. But if you can estimate your gains, you can pencil out the total cost for each option right away and see if there is enough difference to make your choice.

Re: 1099-R code "E" to correct a previous mistake
Posted by: skitaxq99, September 4, 2017 02:02AM
Thank you Alan S. for the quick responses. appreciate it!

I happened to invest part of my rollerover IRA (the receiving account) in stocks, and so far with bad luck. the total balance is less than that of the balance at the rollover. That's why I mentioned the excess match contribution would have a loss associated. That's why I was asking if I do corrective distribution before Oct. 15th, 2017, can the loss (negative income) be taken into the calculation of tax, which may reduce the taxable amount on 2016 1040X?

When filing the 2016 1040X, I should include all 3 1099-R forms (both 1099-R correction, 1099-R code E form and 1099-R corrective distribution), right?
and as you mentioned "The 1099R for the IRA excess contribution removal will not be issued till next January", so is it ok for me to wait until January next year to file 2016 1040X without late fees or penalty? or should I file 2016 1040X before Oct 2017 for the $500 taxable amount, and pay tax, and then file another 1040X again next year after receiving the 1099R of the removal?

I guess the least hassle choice might also be the least costly one since the excess may not have gain associated, but applying it to 2017 would incur 6% excise tax on 2016 ($30). if I go with directly removing the excess (ASAP before 10/15/2017), besides 1040X, do I still need to file form 5329?

Thank you again!
J.

Re: 1099-R code "E" to correct a previous mistake
Posted by: Alan S., September 4, 2017 06:08PM
With a loss on the excess IRA contribution, I would simply request the corrective distribution of the $500 excess IRA contribution ASAP. You will get back less than 500 so there is no earnings to be taxed or penalty, no excise tax and no 5329. Your total tax will be on the 401k 1099R for 500 of income and no 10% penalty.

Wait until right after you and the IRS get the IRA 1099R for the corrective distribution around 2/1/2018 and then file the 2016 1040X with an explanation in the space provided on the 1040X. That is the best option for the IRS to understand the 1040X. Do not even consider doing two 1040X forms.

You can also make your 2017 IRA contribution unaffected by all of this.

Finally, you cannot net the loss occurring in the IRA with the 500 1099R to reduce your taxable income. Excess contributions to a 401k are treated separately from excess contributions to the IRA. There would be a misc deduction possibility for an IRA loss, but only if you close out all your TIRA accounts for less than your basis, so this is not even close to a possibility in your case.



Sorry, only registered users may post in this forum.