How to correct (or not) 10% withholding on roll over due to client error?
I have a client who submitted paperwork to the original custodian for a transfer to a new custodian. The 1099R shows entire account distributed but 10% withheld (due to client filling out the form incorrectly and electing the withholding).
The corresponding 5498 has the net amount received as the contribution amount. thus the difference looks like an early distribution. I am thinking I can file F5329 and use an exception to not tax the extra distribution. that said I would need to get the distribution paid into the new account, which would just look like a contributiion in 2016 unless the paperwork can be changed by the custodian.
Any thoughts on this mess?
The withholding is ~$3,500 but the tax on the amount not rolled over is about $358 so right now I am thinking of just explaining the mistake to the client and how its reported. The net effect is a refund of most of the withholding.
Permalink Submitted by Alan - IRA critic on Wed, 2016-06-01 19:39
Apparently, a 60 day rollover was done less the 10% withholding. In order to complete that rollover the client would have had to come up with the withheld amount within that same 60 days. Since this was not done, the client will owe tax and also the 10% penalty on the amount withheld. If client qualifies for an exception to the penalty, a 5329 can be filed with a 1040X for the year of the distribution, and client will only owe the tax on 3500 but no penalty.