Retroactive withdrawal from 403(b)
My wife, who works only 16 hours/week, signed up for her employers’ 403(b) plan in Dec ’07 and made a total contribution for 2007 of $44. She had previously contributed $5000 to her traditional IRA in 2007. While preparing our tax return, I discovered that her 403(b) contribution negates the deductibility of the IRA contribution and increases our tax liability by $1600! What are the chances that she could convince the 403(b) administrator (Prudential) to allow her to opt-out of the plan, retroactively?
Permalink Submitted by Alan Spross on Mon, 2008-02-04 21:14
Unfortuneately, no chance. Same for 2008 as well, since at least one contribution has been made for 2008 by now, and that is all it takes.
The options now are:
1) Recharacterize her TIRA contribution to a Roth contribution if your joint income does not exceed the Roth threshold.
2) Leave as a non deductible TIRA contribution and file Form 8606 to report the 5,000 as added or initial basis to her IRA.
3) Withdraw the contribution by telling the custodian that she wants the contribution plus any allocated earnings returned. The earnings will be reportable on the 2007 return and be subject to early withdrawal penalty.
This could also affect your own IRA deduction depending on your joint income. There is nothing with respect to the IRA situation that can be done for 2007 at this point. Whatever you decide is best among the options above may also be best for 2008, and/or forget her IRA for 2008 and increase the 403b deferral.
Permalink Submitted by Bill Lumnitzer on Tue, 2008-02-05 02:34
Even more unfortunate is that without the TIRA deduction, we also lose the tax rebate, bringing the opportunity cost of the $44 ,contribution to over $3,000! Mea culpa, but my wife would never have made this election had she understood the consequences. The best option may be to recharacterize her TIRA contribution to a Roth. Thank you very much for your help 🙄
Permalink Submitted by Alan Spross on Tue, 2008-02-05 03:45
I don’t think the final rebate terms have been decided, but in the House Bill I think there was a phaseout due to high income, not a full loss when the income threshold was passed.
Otherwise, this has been unfortunate.