401(k) Distribution
I have a client that was terminated from her employer and took a full distribution of her 401(k) Plan with the company. The 401(k) provider automatically withheld the 20% for taxes. 60 days has not passed and the client has changed her mind and now wishes to change the distribution to be treated as a rollover to an IRA.
Does she just make the contribution to the IRA of the net amount that she recieved for the distribution or should she make the contribution to the IRA for the full amount that she would have rolled out of the plan if it were processed as a rollover and not a Distribution? I’m just trying to help her figure out how that 20% tax payment to the IRS will be figured into this and how she should proceed.
Thank you!
Permalink Submitted by Alan Spross on Mon, 2009-04-13 22:02
IF she has the money, she can add the amount that was withheld to the amount she received and complete the rollover within 60 days of receipt of her check. This is the only way to get the full amount rolled over at this point and avoid taxation. She may be able to reduce her withholdings or tax payments to the IRS on other income sources in order to get her tax payments back in line for 2009, but there is no way to get the 20% back from the IRS until she files for 2009.
If she does not replace the withheld amount, the 20% itself will be taxable and subject to early withdrawal penalty unless she would reach age 55 before the end of 2009.
If she needs some of this money to live on and is 55 per above, it may be best not to complete a 100% rollover, since once the funds are contributed to an IRA, the penalty age goes up to 59.5 if she needs funds from the IRA.
Permalink Submitted by Saleah Harpole on Mon, 2009-04-13 23:43
Thank you Alan! That information was very helpful!