IRA 10% erroneous withholding (how to reverse)

Submitted by Avo Mavilian on Wed, 2023-07-05 16:59

Fact Pattern:
1. Person requests 400K be transfered from insurance comapny to custodian (IRA to IRA)
2. Insurance company sends $360K to client (made payable FBO client), and sends $40k to IRS.

The 40K should have never been witheld – it turns out it was an error filling out forms.

Question: How do you recover the 40k from the IRS? The insurance company is saying sorry, we can’t reverse it.



Submitted by Alan - IRA critic on Wed, 2023-07-05 21:19

  • The only way to recover the 40k is by filing a 2023 return early as possible in 2024 and receive a refund. But to recover the funds earlier, the person should reduce other withholding or estimated tax payments ASAP to reflect the 40k already paid to the IRS. 
  • The amount withheld is the smaller problem. The larger problem is the loss of tax deferral on that 40k unless the person is able to come up with 40k to complete the rollover using other funds. If not, it might be possible to use custodian error (if it actually was a custodian error) to file a self certification form for a late rollover if 60 days has passed.
  • I am not totally sure that there is “no way” to recover erroneous withholding by the custodian, but I have never heard of a custodian who recoved it or even tried to recover it, whether their error or not. 

Submitted by David Mertz on Wed, 2023-07-05 21:31

  • This was processed as a distribution and rollover, not as a trustee-to-trustee transfer.  The $400K distribution is subject to the limit of one distribution being rolled over in a one-year period.
  • If it’s still within 60 days of the distribution, to complete the rollover of the $40K the client would have to come up with $40K from another source and deposit that into the IRA as a rollover contribution.  It’s not clear that this could be considered to be a financial-institution error that would allow extension of the 60-day rollover deadline.
  • Whether the $40K is rolled over or not, the client will get any excess 2023 tax withholding as part of their tax refund after filing their 2023 tax return.

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