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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11381
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I am attempting to rollover the funds in a 401k account with

Customer Question

I am attempting to rollover the funds in a 401k account with a former employer to an IRA. After much haggling to custodian of the 401K plan issued a check dated 8/17/2016 to me, but deducted federal and state income taxes. This leads me to believe that the check was issued as a distribution rather than a rollover and would so reported to the IRS. At the time the check arrived I was in the hospital fighting for my life, but I have now recovered and want to take advantage of the 60-day rule. Won't I need a 1099-R to move my funds without tax implications. What can I do if I can't get the custodian of the 401k plan--which wasn't at all cooperative in the first place to issue the 1099-R and return the more than $23,000 withheld for taxes to me so that I can include those funds in the rollover?
JA: The Accountant will know how to help. Is there anything else the Accountant should be aware of?
Customer: Not that I know of.
Submitted: 7 months ago.
Category: Tax
Expert:  Lane replied 7 months ago.

Hi. I can help you here. ... My name's Lane.

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Just to lay a foundation, there are two ways to get dollars into an IRA from a workplace qualified plan (401(k), 457, 403(b), etc);

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(1) a trustee to trustee transfer (sometimes called a custodual transfer) - IRS calls this a DIRECT rollover, and

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(2) a rollover, where constructive receipt has been taken (check made out to you) given to you and you get it back into one of the options (another qualified plan, an IRA) within 60 days.

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When money is distributed to the individual, (option 1), by law, the administrator must withhold 20% - at least. This is becasue once that's done, the plan can no longer predict whether the dollars are going back into an IRA. The individual is now in complete control of whether the dollars will go back into an IRA within 60 days.

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In this scenario (there is ALWAYS a 1099-R). If the individual DOES get the dolllars back into one of the qualifying accounts for rollovers, such as an IRA, then there will be two things that IRA gets to explain that the dollars were, in deed, rolled over;

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(1) a 5498 from the receiving institution, and

(2) you will report the rollover by showing the gross distribution on line 15a of IRS Form 1040. (the amount shown in Box 1 of the 1099-R), and then showing on line 15b what portion of the rollover was taxable.

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If you do the costodial transfer/ trustee transfer/direct rollover option, the plan administrator is NOT required by law to withholld the 20% so you don't have to worry about coming up with the 20% out of pocket, so that the amount distributed equals the amount rolled over.

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As you can see from IRS here: https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions ... "If you later roll the distribution over within 60 days, you must use other funds to make upfor the amount withheld"

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IRS stongly enourages the DIRECT rollover over the take a check rollover method ... by allowing for an UNLIMITED number of DIRECT rollovers, while only allowing one distribution type rollover per year.

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I see three options here, as it appears the distribution was done to you rather than directly to another plan:

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(a) Borrow, or come up with in some other way, the funds so that the amount being rolled back in matches the distribution (this will cause the full amount of withholding to come back to you as a refund, all other things being equal) - showing "taxable amount" on line 15(b) as zero

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(b) Go ahead and show that a PART of the rollover (the amount whithheld and NOT added to the rollover by you) as the taxable portion on line 15(b) of your return (this portion will be added to your taxable income and there could be a 10% penalty if you left the company after age 55)

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(c) See if the plan will allow you to roll back in, and then do a DIRECT transfer to your IRA ... Since the Pension Pretection Act of 2006 MANY plans were written such thet dollars could be rolled out and then back into the same plan .... It's certainly legal now, BUT the specific plan document for this plan may or may not allow.

Expert:  Lane replied 7 months ago.

Please let me know if you have ANY questions at all, before rating me.

I hope you’ll rate me (using those stars, or faces on your screen, by clicking submit) based on thoroughness and accuracy, rather than any good news / bad news content. Otherwise I’ll receive no compensation for the work here at all, from JustAnswer.

Thank you!

Lane

I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.