replacing tax that was withheld on a 60 day rollover
Hello Alan,
I have a client who is executing a 60 day rollover following a mistake by the 401k plan administrator. $14,000 in taxes were withheld and our intent is to come up with the full $14,000 so that he rolls over the full amount within 60 days. Our understanding is that he can sell bond funds in an after-tax brokerage account to create this $14,000 so that the Form 5498 will show a rollover contribution matching the figure on the Form 1099 from the 401k distribution. Are we on the right track?
Thanks,
Chris
Permalink Submitted by Alan - IRA critic on Thu, 2025-04-24 11:51
Yes, he can raise the cash from any source, and must contribute it to the IRA within 60 days of the 401k distribution. The IRA custodian should be told that this is a “rollover contribution”. As a result the IRA custodian 5498 for 2025 will show the total rollover contributions equal to the gross amount of the 1099R from the 401k plan.
The actual withholding will take care of a good share of the 2025 tax payments, so client would probably want to reduce other withholding or estimates to avoid having the IRS receive too much for 2025, since the rollover will be non taxable once the withholding is replaced.
Note that this withholding replacement does not count toward the one rollover per 12 month limitation because the funds were distributed from a 401k.