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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I withdraw 6 times 401 k to pay my credit card for gambling.

Resolved Question:

I withdraw 6 times 401 k to pay my credit card for gambling. Within 2 months of first withdraw, I win the money and roll it back. DO I Still need to pay income tax and penalty

Submitted: 8 months ago.
Category: Tax
Expert:  Lev replied 8 months ago.

Lev :

Hi and welcome to our site!
In general - distribution from your 401k plan is taxable.
However - if the money are rolled over to another qualified plan - such distribution is classified as rollover and not as taxable distribution.
If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can generally defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA.

Lev :

If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. However, the full amount is treated as distributed to you even though you actually receive only 80%. You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA.
If you are under age 591 2 when a distribution is paid to you, you may have to pay a 10% tax (in addition to the regular income tax) on the taxable part (including any tax withheld) that you do not roll over.
You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan.

Customer:

Since my intention is not to rollover, I understand I have to pay 10% penalty. How about the part I roll back, could I get more penalty from IRS

Lev :

Your original intention is not relevant. However - there is no "roll back" option - when the rollover is discussed the IRS specifically mentioned rolling it over to another qualified retirement plan or a traditional IRA.
If the transaction doesn't qualify for rollover - it is subject for both - income tax and penalty unless any exemption could be used.
When the transaction qualifies for rollover - neither income tax nor penalty woudl be applied.

Lev :

In general if you are under age 59½ at the time of the distribution, any taxable portion not rolled over may be subject to a 10% additional tax on early distributions unless an exception applies.

Customer:

I understand my withdraw part has to pay income tax and10% penalty, my question is the Fidelity alllows me to re-invest , could this action be penalized

Lev :

There is no "roll back" or "re-invest" option.... That would not qualify as rollover.


There is an alternative: you can temporarily move the money to an IRA (called a conduit IRA) before moving it back to your 401k plan. After that - you can now roll over distributions from an IRA to a qualified plan. Asa long as you are within 60 days period - that would allow to satisfy rollover requirements.

Customer:

I don't have the problem to pay income tax and 10% penalty for my withdraw. My question my investment bank allows me to put the money back to my 401k account, could this cause further problem

Lev :

There will not be "further problem" - however - distributions will be taxable for you later when you will take such distributions.
So - you will be taxed twice - that is the only issue.

Customer:

thanks

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22655
Experience: Taxes, Immigration, Labor Relations
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