IRA vs 401k In Service Withdrawals
Have a client that is 61 years old with $445,000 in their 401k plan. His plan allows for in-service withdrawals. He believes that within 60 days, he can put all or some of the money back in. Here are my questions for your help:
- Confirming that a 401k withdrawal has a mandatory 20% withholding. However, since in-service withdrawals are allowed, if we rollover the 401k withdrawal to an IRA, there is no mandatory withholding. Please confirm my understanding is accurate.
- Are there any provisions within a 401k, that allows a participant to put money back in and avoid any tax issues within a 60 day rollover rule like the IRA has?
- If the client rolls over the 401k to an IRA, and then takes a distribution of $200,000, but within 60 days can put back $150,000, will he still be responsible for the tax liability on the $200,000? And will he ever be allowed to put some of it back, without doing all of it.
Always appreciate your helping our understanding to serve others.
Todd Martin
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-14 13:55
A direct rollover of a 401k to an IRA has no withholding, however if a distribution is made to the participant then mandatory 20% withholding is required.
Many 401k plans allow loans if a participant needs funds, but not 60 day rollovers. If the distribution is rolled to an IRA, it will be possible with many 401k plans that a reverse rollover from the IRA back to the 401k will be allowed.
A distribution from an IRA can be rolled back only once every 12 months. A distribution can be taken from an IRA with or without withholding and can be rolled back in part or entirely within 60 days. If withholding was taken out of the distribution, a complete rollover is still possible by the IRA owner providing other funds to replace the amount withheld and complete the rollover.
Permalink Submitted by Todd Martin on Fri, 2025-03-14 17:41
Thank you, Alan. If we rolled over the $200,000 from the 401k to the IRA and then took the full $200,000 distribution from the IRA without any withholdings, and the client put back $150,000 of said distribution within the 60 days, would he only have to pay taxes on the $50,000 that he did not put back? Or would he still need to pay taxes on the full $200,000 even though he put back $150,000?
Thank you.
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-14 17:52
Yes, taxes only on that 50,000.
There will be a 1099R issued for 200,000 that would be reported on line 4a of Form 1040, “rollover” shown on the dotted line next to 4b and 50,000 on 4b (the taxable amount).
Client will then have used up his one IRA to IRA rollover for the following 12 months as long as he rolled any amount back to the IRA.
As for the 401k loan option, even if the plan provides loans, the max he could borrow would be 50000, but would have up to 5 years to repay it. But if he leaves the employer, he will have to repay it most likely within 60 several months.
Permalink Submitted by Todd Martin on Fri, 2025-03-14 20:09
Got it. Thank you for your expertise.