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Last January my husband lost his job. We contacted Fidelity…

Hello, Last January my...

Hello, Last January my husband lost his job. We contacted Fidelity to roll his 401K into an IRA, but also wanted to do a split transaction. They explained that we could take a 1 time withdrawal without a 10% penalty. This was what we had decided to do. However, we had to wait for his company to deposit his final profit sharing money in the account before rolling it over. When we called back to complete this, the person at Fidelity somehow changed the plan and did a 100% roll over and then a withdrawal. He did not explain to us that in doing it in this order, it would cause us to have to pay the penalty. I didn't learn that this was a problem until doing our taxes this year. We contacted Fidelity and then did a "tape pull" and said that we agreed to the 100% roll over. My guess is that we probably did but did not understand what this meant. We don't understand why the guy who knew what our intentions were, would have done the transaction this way. There case records even show that in the first conversation we wanted to do a split transaction. Is there anything we can do to get the IRS to relieve us of that penalty. My husband is still not working.

Accountant's Assistant: The Accountant will know how to help. Is there anything else the Accountant should be aware of?

I don't think so

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3/10/2018
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 18,178
Experience: 15years with H & R Block. Divisional leader, Instructor
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Hello, I'm Robin. Welcome to JustAnswer. I'm reviewing your question now and typing up my reply. I'll post that in just a few moments.

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Customer reply replied 4 months ago
ok thanks

When you rollover the 401k t an IRA there is no penalty because you do not receive any of the money. There are exceptions for the 10% penalty and maybe the one this person tried to explain was, if the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan) they are not penalized. That is not a one time withdrawal unless all is taken out. It is under Tax Code 72(t)(2)(A)(v),72(t)(10). That is only for the 401k not an IRA.

I will supply you with the full list of exceptions and you can see if any may apply for you

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions

If one does you use form 5329 to not pay the penalty.

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You can see there is no one time allowed distribution with no tax unless the specific exception applies.

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Customer reply replied 4 months ago
I'm sorry, I wasn't completely clear. We rolled over $90k of his $150k and took a payout of $60. We withheld $15K for taxes. In doing our taxes now, we are having to pay 10% penalty on the $60k

That is not an exception for the penalty.

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Because the $60k was withdrawn it is subject to the tax and to the penalty.

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Customer reply replied 4 months ago
I understand that this is not an exception. But Fidelity made the mistake.

Whether the withdrawal was from the 401k or the IRA that would not change the penalty amount on the actual $60k unfortunately.

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Customer reply replied 4 months ago
My husband was 57 (so over 55).

Yes but the 72t would not have fit because that was not periodic and the rollover would not have met the requirements for periodic payments

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Customer reply replied 4 months ago
There is a one time distribution from a 401K if you are over 55.

Yes, if all is taken as a distribution. It was not.

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If you can get Fidelity to correct the rollover then you can use the 72t.

if you leave your job January 1st of the year you turn 55 (50 for certain government agencies), you are allowed to pull out lump sum distributions out of your company retirement plan penalty free under 72t. Once you rollover into an IRA, you lose out on that opportunity.

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Customer reply replied 4 months ago
I disagree with your statement about it having to be all. You can do a split transaction and roll part over and take part in cash and not incur the penalty if you are 55. Fidelity was supposed to do this and unfortunately rolled it all over and then did the distribution. Fidelity is saying that although that was not our intention, we agreed to the 100% roll over and therefore they will not take responsibility. My question is, doesn't the IRS have any wiggle room for such situations?

If fidelity will not correct this situation then you cannot claim otherwise unfortunately.

I actually said in my last post "if you leave your job January 1st of the year you turn 55 (50 for certain government agencies), you are allowed to pull out lump sum distributions out of your company retirement plan penalty free under 72t. Once you rollover into an IRA, you lose out on that opportunity."

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About wriggle room, no. The IRS will go by the 1099R unless it is corrected.

Robin D.
Robin D., Senior Tax Advisor 4
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Experience: 15years with H & R Block. Divisional leader, Instructor
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