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It seems this would be a regular distribution and therefore subject to the 10% early withdrawal penalty if you are under 59 1/2. Please see IRS Retirement topics: Exceptions to tax on early distributions for additional information.
If you do not take out the excess amount by April 15th of the following year, then you are taxed twice on the excess deferral left in the plan. This happens once when you contribute it and again when you receive it as a distribution. You can't include the excess amount in the cost of the contract even though you included it in your income.
Please follow these steps to enter Form 1099-R:
Please see Pub 525 for additional information.
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