Lump Sum Distribution from a 401K
Good morning,
I have a client who erroneously took a lump sum distribution from his 401K. He has the check in hand, minus the 20% and is 55 years old. He would like to put the monies back into the 401K and do a rollover to an IRA – is that possible, or would he need to deposit into an IRA to avoid the 10% early withdrawal penalty, and the 20% withheld would just be reflected on his this year’s taxes?
Thank you,
karey
Permalink Submitted by Alan Spross on Mon, 2009-01-26 19:39
First option: Call the plan administrator and see if this check can be returned and any distribution forms he completed rescinded. This should be attempted ASAP, but the chances are quite slim that the plan would agree to this.
If the plan agrees and if he separated from this employer in the year he turns 55 or later, distributions directly from the plan are penalty free under the age 55 separation from service exception.
Second option: Above will probably not fly, therefore he can do an indirect rollover within 60 days. He would have to front the withheld funds in order to complete the rollover. If the check was issued in 2008, he does not have long to recover the withholding, but if it was issued in 2009, then he can recover the withholding be cutting back on any other estimates or withholding for the rest of 2009. If he does not have the money, the age 55 exception would still apply to the withheld funds if he qualifies for it.
Note that he has 60 days to complete the rollover with the 80% share he presently has. He may need to consider a 72t plan from the IRA if he needs to use IRA funds for income prior to age 59.5 and wishes to avoid the penalty. The age 55 separation exception does not apply to funds that are contributed to an IRA.
Permalink Submitted by [email protected] on Mon, 2009-01-26 19:49
Thank you so much – this was incredibly helpful