Undoing a Pension Lump Sum Distribuion
A client referred their brother to us with the following challenge. His is 58 years old and needed additional monthly inocme. He had a pension from a previous employer and called them to figure out his options. After providing him the information, he was instructed that the fastest way to get his monthly income was to go online to complete the process which he did. Somehow, he completed the information incorrectly and instead of getting additional monthly income he received a lump sum distribution with the mandatory 20% being withheld. Confused, he contacted the pension plan and explained he never intended to get a lump sum, obviously made the wrong selections online, and wanted to return the check back into his account and have the 20% withholding put back as well. He was told that it was too late and nothing could be done. Is this true? Since he has not cashed the check does he not have the right to send the check back? Does he not have any recourse or options?
I know that he can rollover the pension to an IRA with the 60 day rollover rules. However, is there any way to get the mandatory 20% back for him without waiting until he files his 2013 taxes?
Thank you for your help and assistance.
T. C. Martin
Permalink Submitted by Alan - IRA critic on Sat, 2013-04-13 00:52
It is not likely that further efforts with the prior employer will get them to change their mind unless he can prove that the distribution was their error and not his. Therefore he should concentrate on raising the money to replace the 20% witthholding so he can complete the IRA rollover within the required 60 days from date of receipt and eliminate tax and penalty on the amount withheld. Reducing tax payments he otherwise would make for 2013 may help since it is almost another full year for him to get a tax refund.
Permalink Submitted by Todd Martin on Tue, 2013-04-16 19:28
Thank you Alan for your response. To validate, my client will have no recourse and there are no other alternatives. He must come up with the 20% withholding on his own to deposit into an IRA under the 60 day rollover rule. What happens if he can’t do that? Will he only pay penalities and taxes on the withholding amount and can still rollover the 80% he received? There is no way for him to get that 20% withhodling any earlier than when he files his taxes with the IRS for 2013?
Permalink Submitted by Alan - IRA critic on Tue, 2013-04-16 20:18
He can rollover over the 80% he received and will only pay tax and penalty on the 20%. If he can come up with half the withholding to add to the amount he received, then he would only owe tax and penalty on the 10% that did not get rolled over. As noted in prior post, if he does not pay taxes he otherwise would have, he would have the money sooner. Sounds like he is retired, so if he pays quarterly estimates, his first estimate was due yesterday. Since the IRS already has the 20% for 2013, he may not need to pay that estimate and could add what he would have paid to the rollover. A short term loan would also be worth it to avoid tax and penalty. The IRS can also extend the 60 day rollover deadline if he does not use the money for something else and has a good reason (usually health related) to request extension of the deadline in a letter ruling request, but if he just misinterpreted the form, it may not be worth pursuing a letter ruling.