401(k) Rollover Trouble
A client handed me a check over the weekend for the portion of his former 401(k) that I will manage. He is using another advisor for the remainder. My instructions to the client were to complete a direct roll of the specified amount going to the other advisor, and then to complete the direct roll with our firm. The check I received was from his personal account, which told me “the film had been exposed.”
Indeed, the client took a full distribution from the plan and the plan withheld 20%. He invested a portion with the other firm, and gave me a check for the balance. Is it possible for the client to put all the money back in the original plan for a “do-over” with the right process to avoid withholding and tax/penalty implications?
Also, if there is NO way for a “do-over,” is the 20% withheld considered a distribution that he has to make up prior to tax time to avoid the tax and penalty? Or, is he able to deposit the 2007 tax refund for the 20% withheld into an IRA that we’re setting up for him in 2007?
Thanks!
Permalink Submitted by Denise Appleby on Mon, 2007-09-10 23:50
There is no option for a ‘do over’.
The client may:
1. Make up the 20% our of his pocket, and rollover the amount (20%) to any one of the two traditional IRAs within 60-days of receiving the distribution . When he files his tax return for the year, the 20% withholding will either reduce his taxes owed or increases his tax-refund.
2. Leave it as is. The 20% will be treated as a distribution, included in income (ordinary income) for the year. If he was under age 59 ½ when the distribution occurred, he will owe a 10% early distribution penalty, unless an exception applies.
Permalink Submitted by Alan Spross on Tue, 2007-09-11 04:27
Since no reversal option, he should try to make up as much of the 20% as possible to reduce the penalty and loss of tax deferral. He might reduce his withholding immediately and/or final two estimates to recover the lost cash flow sooner than late next winter.