403b to IRA transfer issues
My client wanted to move an old annuity company 403b from a prior employer to an IRA in a brokerage account. We did the proper brokerage firm paperwork but the annuity company wanted their own surrender paperwork completed. It did not offer the option of checking “transfer”…they said just to name the brokerage firm IRA registration in “alternate payee” box. The money moved over…she did not have constructive receipt at any time and money is in the IRA. Unfortunately, the annuity company withheld taxes before distributing. Ideally, we would like the money withheld for taxes to be in the IRA. Is there a way to achieve that? If not, how do we get the money out of the IRA since it appears she’s already paid most of the taxes on it?
Permalink Submitted by Jose Morales on Wed, 2012-02-01 16:50
What should have been requested was a Direct Rollover, not a Transfer. A Direct Rollover would have resulted in no need for withholding. If the client has funds available to make up for the withheld amount they can simply deposit those funds into the IRA as a rollover. If not, the withheld amount will become part of this person’s income for the year for which they may owe taxes and (depending on age) a premature distribution penalty. It would have been nice for the annuity company to discuss all of the options for moving the funds from the 403(b) to the IRA so that the difference between a rollover and direct rollover would have been clear.
Permalink Submitted by Denise Appleby on Sun, 2012-02-05 02:01
I agree with urusei2 that what should have been requested is a direct rollover, for which no withholding should be done. However, the fact that they paid the fund to the IRA and sent the amount to the IRA means that it was done as a direct rollover, despite any terminology used during conversations with the annuity provider about the transaction.
Please ask the annuity company to reverse the withholding. It might help if they are made to understand that they should not have withheld income tax in the first place.
Permalink Submitted by Michael Moffitt on Mon, 2012-02-06 04:58
Denise, I agree with your answer. Actually we did request a rollover, not a transfer. They said the IRA rollover would be an “alternate payee”. Because we did not like the look of the form, we made sure the alternate payee was XYZ IRA Rollover FBO Client Name, along with an account number. So they rolled over everything but the taxes withheld. Unless they reverse the withholding, issue a corrected 1099R and roll the withheld amount to the IRA Rollover, I’m not sure what Plan B would be. Is it possible for them to NOT correct this, even if they claim the wrong form was used?
Permalink Submitted by Denise Appleby on Mon, 2012-02-06 11:26
[quote=”mikem”]Denise, I agree with your answer. Actually we did request a rollover, not a transfer. They said the IRA rollover would be an “alternate payee”. Because we did not like the look of the form, we made sure the alternate payee was XYZ IRA Rollover FBO Client Name, along with an account number. So they rolled over everything but the taxes withheld. Unless they reverse the withholding, issue a corrected 1099R and roll the withheld amount to the IRA Rollover, I’m not sure what Plan B would be. Is it possible for them to NOT correct this, even if they claim the wrong form was used?[/quote]
Mikem,
Hopefully, they will be open to (and appreciate) the fact that you are making them aware of their mistake. You might need to have the matter escalated to a manager. If they refuse the fix their mistake, submitting a written complaint and demand for the withholding to be reversed should work, especially it if includes an explanation of the withholding requirements that apply to direct rollovers.
Cite them Treas. Reg. § 31.3405(c)-1 Question and Answer 8 http://edocket.access.gpo.gov/cfr_2010/aprqtr/pdf/26cfr31.3405%28c%29-1.pdf