Rollovers
Client who is 58, withdrew funds from a Traditional IRA to make a down payment on a home purchase. Client has assets in a 457(b) plan thru former employer. Can client rollover funds in the 457 plan to the IRA within the 60 day window to replace the funds in the IRA and avoid taxes and penalty?
Permalink Submitted by Alan - IRA critic on Tue, 2023-01-24 16:37
No. Client could take a taxable distribution from the 457 and use those funds to complete the IRA rollover. While client would then need to replace the 457b distribution within 60 days, if they can’t at least the 457 distribution will not be subject to penalty, just ordinary tax. Note also that client may have to take a full distribution from the 457b if the plan does not allow partial distributions. In short, client will be left with a taxable distribution at the end of the chain unless they can come up with other funds to complete the final rollover.
Permalink Submitted by Don Wilson on Tue, 2023-01-24 17:07
Thank You for your reply. The client mentioned he has assets from other sources to cover the 20% federal tax withholding. Will the 1099 from the IRA custodian be marked as a pre-mature distribution? Is the client required to file additonal forms/paperwork to substantiate the funds replaced in the IRA?Thanks for your help!
Permalink Submitted by Alan - IRA critic on Tue, 2023-01-24 21:43
The IRA 1099R will be coded 1 for early distribution, but a 60 day rollover will erase the taxable income. The IRA distribution and the rollover will be reported on lines 4a and 4b of Form 1040. No extra form is needed. The 457b distribution including the amount withheld and the portion rolled over will be reported on lines 5a and 5b. “Rollover” should be entered next to 4b and 5b respectively.