A taxpayer rolled over 401k funds to an IRA using indirect process in which 20% was withheld for taxes by the previous employer without replacing the tax withholding funds. What are tax and penalty consequences for NOT replacing the 20% under the rollover rules?
Yes, it was unfortunate my cousin tried to do this on his own and was badly misguided by a service rep at retail brokerage before bringin to us. So, the 10% is calculated on the amount withheld for not replacing the full amount to the new IRA. But, is there any penalty going forward on the rollover IRA or only regular taxes due on distributions as they ocurr? (I assume the tax payer can continue to elect withholding or just use 1099r’s to pay at filing.)
Withholding can be declined on any IRA distributions, but if not specifically declined the default rate is 10%. There is no penalty going forward with respect to the rollover IRA, just loss of assets. That said, because the rest of the distribution was rolled over, that withholding could result in a good tax refund since the withholding rate on the 20% not rolled over was 100%. Of course this depends on the amount of the distribution and the remainder of his tax liability from other income.
Permalink Submitted by Alan - IRA critic on Fri, 2023-01-20 18:56
Ordinary income tax on the withheld amount, 10% penalty on that amount unless over 59.5 or qualified for a different penalty exception, and loss of balance from retirement plans. A direct rollover would have avoided any withholding.