60 day roll over rule
If you have a client that has a 401k and is going to be opening an IRA with a company that only excepts applications with (cash) such as personal check would it still work to have monies sent to client and then they deposit it in they checking account and then write a check to the new company for the opening of an IRA
Permalink Submitted by Jose Morales on Tue, 2009-06-16 20:40
If funds are moved from a 401K to an individual’s non-retirement account and then used to fund an IRA, this would not be a direct rollover. As an indirect rollover it would be subject to the 60 day rollover rule, but more importantly the withdrawal from the 401K would be subject to the mandatory 20% federal tax withholding. If the individual had $100K in a 401K and took a distribution to deposit in their checking account, they would only receive a check for $80K. The individual would then need to come up with the additional $20K to rollover to the IRA or face taxes and possible penalties for this amount.
It’s hard for me to understand why in this situation the funds would have to go to the individual’s checking account. The 401K administrator, more often than not, will in fact issue a check.
Permalink Submitted by Alan Spross on Tue, 2009-06-16 20:50
That would create major problems for the client because an indirect rollover check made out to the client will result in mandatory 20% tax withholding. In order to complete the rollover, the client would have to come up with that 20%. The 20% sent to the IRS would be taxable and subject to the early withdrawal penalty if not replaced by the client in completing the rollover.
It seems odd that an IRA custodian is not set up to accept direct rollovers from employer plans, since that is where IRA custodians acquire large retirement accounts from. In fact, many IRA custodians will assist with the rollover itself. I think I would be inclined to question whether the client will be best served using this particular custodian. This might also be an indication that this custodian will not offer a direct transfer out in the event the client later wants to move this IRA elsewhere.
The 60 day rollover rule does apply to indirect rollovers, but the one rollover limit does NOT apply because the funds are not originating from an IRA. Having to come up with the 20% is the main technical problem in completing an indirect rollover from an employer plan.