Penalty Question

Submitted by Jennifer Poole on Tue, 2018-12-18 17:22

If a client has a $34,000 state of Alabama retirement that they want to rollover because they no longer work for the state, can he roll it over and then take out the 20% taxes? For example, take $6,800 and pay the 10% penalty out of pocket?



Submitted by Alan - IRA critic on Tue, 2018-12-18 18:47

  • If he does a direct rollover, there is no mandatory withholding and there is no tax liability for the direct rollover. If you are asking if a subsequent distribution from the IRA itself can be used to pay some portion of taxes due on other income of the client, the client could take an IRA distribution and have 100% withheld, but there would also be a 10% penalty on the IRA distribution unless client is 59.5.
  • On the other hand, if client takes a 34,000 distribution (no direct rollover), then 20% will be withheld for federal taxes (6,800). Client could roll over the rest, but the 6800 would itself be taxable income. If client has 6800 of other money to replace the withholding he could add that to the amount distributed to bring the total back up to 34,000 and do a 60 day rollover to an IRA. The end result is no taxable income, but his withholding account for the year has added 6800. This is a way to avoid an underpayment penalty if client has not paid in enough to cover taxes on his other income, but would not result in any taxes on the distribution itself since the entire 34,000 would be rolled over.

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