I have a 53-year-old client who retired this past year as an air traffic controller for the federal government. She decided to roll over her TSP (the fed version of a 401k) to an IRA.

The TSP also had a balance in the Roth account. The TSP sent a check to her in her name for the proceeds of the Roth (about $70,000), to her home about 30 days after the Traditional portion was sent to the new custodian. She never made a distribution request nor gave instructions on where to send the Roth proceeds – they just sent it to her.

As the Roth check was made out to her, instead of the new account custodian, they withheld 20% of the gain in the contract as an early distribution, and she was 2 months shy of 5 years in the Roth account (which was only $1300), but coded all of the gain ($6500) as taxable on the 1099-R as the account was not over 5 years old. We deposited the received funds into a Roth at that point and coded as a 60-day rollover. When the check was sent to her, neither she nor we were notified of the withholding of 20% of the account’s gain. We discovered this when she received her 1099 recently.

My question is,

1. Could she now (7 months later, and in a new tax year) contribute the 20% (about $1300) that was withheld from her Roth distribution, and avoid the 10% premature distribution penalty, and how do we recode the distribution as a rollover for the basis that was transferred into a Roth? In other words, how do we prepare the paper trail in the event of an audit?

2. Is it too late to contribute the $1300 as we are well past the 60-day rollover windows from when those funds were withheld?

I’d appreciate any insight you have to offer.

Kind regards,

Thom