QDRO Distribution by mistake
HI all,
Client requested rollover for her QDRO in 2021 and instead received a distribution (check) with taxes taken out. She pushed back with the custodian told her she called to request the distribution. Now she has this check and is still within the 60 day rollover time frame. Best way to handle this situation?
Could she deposit this check into IRA and immediately do a Roth Conversion since the taxes were already paid on this distribution.? The other item is the 1099 R will be issued for her 2021 taxes and the IRA deposit will be for 2022 (unless she can still designate this for 2021-which maybe she can) but the Roth Conversion would count for 2022. So the timing is odd.
Any thoughts on whether or not this is even possible. I am trying to avoid her having to pay taxes twice. I feel like I am being short sighted here.
Thank you in advance!
Pam
Permalink Submitted by Alan - IRA critic on Fri, 2022-01-07 15:28
She can do a 60 day rollover of her proceeds to either her TIRA or Roth IRA, or some combination. Rolling to TIRA would eliminate taxes when she files, but rolling to a Roth will not, therefore some combination might be in order depending on what her long term goals are. She also has the 20% withholding to deal with, and she will have to temporarily replace the withheld amount using other money if she wants to complete a full rollover of the distribution and eliminate the tax bill. There should’t be any penalty on the distribution due to the QDRO penalty exception. Again, she has 60 days from the receipt of this check to complete any rollovers and can then report them on her 2021 tax return.
Permalink Submitted by Pam Hocevar on Fri, 2022-01-07 19:15
Thank you for your response- are you saying if she doesn’t have to shore up the taxes to make the QDRO amount the whole amount that should have rolled into another acct. She could proceed with simply depositing the net amount she recieved via the check to an IRA and since it orginaited from the employer plan (QDRO) 10% early withdrawal penalty should not come into play.
Permalink Submitted by Alan - IRA critic on Sat, 2022-01-08 01:09
Yes, she could do the partial rollover using just the amount she actually received. There will be no penalty on the withholding portion due to the QDRO exception.