IRA 60 day Rollover
A client takes a distribution from his IRA. He wants to take a distribution from his 401k plan at his employer and to replace these funds within 60 days. He has been told if he does this trustee to trustee the 401k distribution will be treated as a tax free rollover of the 401k distribution and it will be deemed a valid replacement of the original IRA distribution. Thus nothing is taxable using this approach. He is under age 59 1/2. Outside of a hardship distribution I don’t see how his employer’s 401k plan administrator would allow this to begin with. Seeing as he is not replacing the original IRA distribution with other non-qualified funds I believe this would be a prohibited transaction even if it could be facilitated.
Am I correct?
Thank you for your response.
Permalink Submitted by Alan - IRA critic on Tue, 2017-06-13 18:11
Sounds like the client does not have the funds to complete the IRA rollover and he wants to tap the 401k for these funds. To do that he would have to take a taxable distribution from the 401k and use that money to complete the IRA rollover. This cannot be a 401k rollover to the IRA, it must be a taxable distribution so this would not avoid taxes. He would just be taxed on the 401k distribution instead of the IRA distribution. He would also owe a 10% penalty. Therefore, if I understand the situation correctly, he was misinformed about being able to replace the IRA distribution with a 401k rollover. It would have to be a 401k taxable distribution that could not be reported as a 401k rollover.