In-Service Rollover for 50 year old
We have a tax client who is currently being audited for a distribution that was taken from his 401k while he was employed. He was 50 when the funds were rolled from his 401k plan to a self-directed IRA company. 20% was withheld from the distribution and the remainder plus the amount that was withheld was deposited to the IRA. Is this an allowable transaction? If so, what code section governs this type of transaction? If it is acceptable by IRS standards, I imagine the plan document must allow it too.
Any insight would be appreciated.
Thanks!
Permalink Submitted by Alan Spross on Tue, 2010-10-12 22:58
In service distributions options are specified for each qualified plan in the plan document. Allowing them at age 50 is somewhat rare, and this does not sound like a hardship distribution because the 20% withholding was triggered and mandatory withholding does not apply to hardship distributions. Also, hardship distributions cannot be rolled over to an IRA.
Therefore, it appears that he qualified for an inservice distribution for any reason from the plan, but elected to do an indirect 60 day rollover rather than a direct rollover. A direct rollover would have avoided the 20% withholding. Replacing the 20% withheld to complete the rollover is not a problem, but something here obviously triggered an IRS inquiry. Perhaps it was not reported correctly on the tax return.
On Form 1040, the gross distribution should be reported on line 16a with 0 on 16b and “rollover” entered next to 16b. If this was not done, that would explain the inquiry, or if the 1099R issued had a code in Box 7 other than 1 or 2, it would also trigger a question.
Sec 401 is huge and this situation could be based on any number of circumstances, some of which are listed above. But for your basic question, there is no problem doing a 60 day rollover with separate funds replacing the dollars withheld. The distribution must obviously be rollover eligible.
If this does not answer the problem, more info is needed on the reason for the distribution, the coding on the 1099R, and how this was reported on Form 1040.