Back in 2005 at a previous company my 401k was overfunded by $3500 through the company match. This was discovered in a recent audit & several employees who were considered highly compensated received the same notice. I got a letter from the company that managed the 401k saying I had to amend my 2005 1040's by $3500, which I did, pay the additional tax, which I did, & if I had rolled this $3500 into an IRA when I left the company, I needed to take it out of the IRA or face penalties. When I called to take the money ou, they said they will still charge me the early withdrawal penalty & tax. Is this correct? I have already claimed this money as income & was told I HAD to remove it from the IRA. My financial planner has no clue either. Thanks for any help.

Did you ever get an answer to your question? You might want to try posting this questionj in the taxes forum. I agree that it doesn't seem right that the IRA penalizes you for your company's mistake. I wonder if there is a way to claim the 10% penalty back as a credit on your taxes?