non direct rollover
individual had check made out to them not to the institution( no direct rollover) unfortunately but did moved money within 60 days to IRA, they were told they have to pay state taxes???there was no 20% to cover withholding. I assume there will be a 20% federal tax due but a state tax due?? Any thoughts?
Steve
Permalink Submitted by Alan - IRA critic on Thu, 2022-04-14 15:35
If the 60 days has now expired or they do not have the money to replace the amount withheld to complete the rollover, they will owe both state and federal tax on the amount withheld and perhaps the 10% penalty. They will report a partial rollover and that will eliminate tax and penalty on the amount rolled over. Not sure why 20% was not withheld for federal. Was the distribution perhaps not rollover eligible (eg hardship distribution), or was after tax money)? Plans rarely fail to execute mandatory 20% withholding. Many states do not require withholding, in which case state tax on the 20% not rolled over would be due.
Permalink Submitted by steve jackson on Thu, 2022-04-14 20:22
Prior Employer does not allow direct rollovers( yes strange) and they did not do a 20% withholding, individual did not have replacemnet funds anyway. I assume he is now going toreport and pay 20% Federal to the IRS. Any thoughts?
Permalink Submitted by Alan - IRA critic on Thu, 2022-04-14 22:48
His tax bill for the year depends on his total taxable income. The 20% figure is just a tax deposit. His actual tax bill on the gross distribution could be more or less than 20%. and the state tax due depends on the state rules, some of which do not tax retirement income. Unless there are other factors to account for this, this administrator may be violation of several tax code requirements.
Permalink Submitted by David Mertz on Thu, 2022-04-14 23:44
Section 401(a)(31)(A) requires a qualified retirement plan to offer the employee the option of a direct rollover to another eligible retirement plan, including an IRA.