This is a kind of a straight forward situation but I made it little complex due to my limited knowledge of Traditional IRA and 401(k).
In the year 2012, I was working as a contractor. I had a traditional IRA account with Fidelity and contributed $4000 to it for the Tax Year 2012.
Later in that year (2012), I got a full time job and my employer enrolled me in their 401(k) plan.
When the time came to file the taxes, I called Fidelity and explained them the situation as I thought I cannot contribute to Traditional IRA as I have employer sponsored 401(k). Someone at the Fidelity said I can withdraw the money as "Excess Contribution Withdrawal". So I filled out the form and pulled $4000 from it. I did not claim the $4000 contribution in my tax return as "Traditional IRA Contribution". I just treated it as like I never contributed that money.
Now I got 1099-R from them saying the $4000 that I withdraw was actually processed as "Early Withdrawal" and I have to pay tax (33%) on it.
When I explained them what happened in 2012, they said they may be able to go back and correct the problem.
What I do not understand is that even if they correct the situation and send me revised 1099-R, I will still pay Tax on $4000 as it will be treated as "Excess Contribution".
Why can this not be simple as I made a mistake when I contributed the money and then I took it back and did not claim so that should be treated as like it never went to my IRA account.
What can I do to avoid paying "Excess Withdrawal" tax as I already paid the tax on this $4000 as I never claimed them on my 2012 return.
Am I missing something here or am I not able to explain them the situation correctly?