401K withheld taxes client rolled 80% to their Roth IRA.

Submitted by John Stevens on Thu, 2013-05-30 20:24

Client age 35, received a $17,131 eligible rollover distribution check from her 401(k) plan. Her employer withheld $4283 or 20% from her distribution.
1. She decided to roll over the $17,131, but not the $4283 withheld, she then reported $21,414 as taxable income, $17,131 as a taxable rollover (conversion to the Roth, and $4283 as taxes paid. Does she have to pay the 10% additional tax on early distributions on the $4283? or $428?
2. She could have put the $4283 from her emergency fund into the Roth but I advised her not to since the company withheld the 20%

So can she withhold the 10% additional tax on the early distribution?



Submitted by Alan - IRA critic on Thu, 2013-05-30 21:18

  1. 1) Yes, there is a 10% penalty on the withholding amount unless client qualifies for a penalty exception. This is a problem with taking a distribution instead of doing a direct rollover which avoids withholding.
  2. It might have been better to have had her add the 4283 to her Roth IRA to complete the Roth rollover and eliminate the tax and penalty from the withholding. Since this was apparently done in 2012, the 60 days time limit to do that is long gone. But if she has filed her 2012 return, she should have received credit (perhaps a refund) of the amount withheld, even with the 10% penalty included.
  3. Her 2012 return should show 21,414 on line 16a and 16b since the entire distribution is taxable. The withheld amount is shown on p 2 of Form 1040 to get credit for it, and the 428 penalty goes on line 58.
  4. I don’t follow your last question since the transaction has been completed and I assume reported on the 2012 return. The chance for 2012 withholding ended in December.

Submitted by John Stevens on Thu, 2013-05-30 21:26

So she has to pay the $428? She filed for an extention and is submitting her 2012 return now and just wanted to know since she brought the orignal rollver check minus the 20% check to us within 60 days last year if there was any way to avoid the $428 penalty of the 20% withholding. Thanks so much for being good to us and taking the time to answer our question.  

Submitted by Alan - IRA critic on Thu, 2013-05-30 22:29

The only way to avoid the early withdrawal penaly of $428 would be to qualify for a penalty exception, such as paying qualified higher education costs, certain high medical costs, qualified first home purchase etc.

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