rollover employer plan to TIRA
A friend’s wife at age 62 retired from her employer for the previous 16 years and inadvertently asked the 401(k) administrator to send her the plan’s balance (about $120K) for “adding it to her IRA she just opened”. She got a check for 80% of the 401(K) transferred amount, with 20% withheld and sent to the IRS. She was told this would show on her 1099R as a full distribution. When she protested, she was told this could not be reversed. A couple of questions on this….
- I understand that she must make up the 20% withholding with her own money and must do this within the 60 day rollover period. But does she simply include her own 20% personal check with the check from the employer when she deposits it in her TIRA? If so, how will she handle the 1099R that shows the full amount in box 2a (taxable distribution)?
- Will the IRA custodian’s 5498 show the 20% deposit as a contribution on the 5498?
- Will this count under the one IRA rule of one indirect rollover per 12 month period?
I’ve heard of these happening but was never involved in one. I read thru the instruction for the 1099-R, but it didn’t provide any of this information.
Thanks
Permalink Submitted by Alan - IRA critic on Fri, 2025-04-25 18:59
She could endorse over the check and can add another check for the withheld amount. The IRA custodian should be told that this is a rollover contribution. The 1099R must be reported on line 5a of Form 1040, with “rollover” entered on the line next to 5b. 5b will be blank (no taxable income).
The 5498 should show the total rollover contribution and that will match the 1099R.
Because the rollover is from a 401k instead of another IRA, it does not count against the one rollover limitation.
The taxpayer could either deposit the check into their checking account and write one check for the total distribution, or endorse over the check to the IRA and add another check for the withheld amount. Both should be coded as rollover contributions for 5498 purposes.
Given that the withheld amount will be credited to 2025 taxes, other estimated taxes or withholding could be reduced to offset the withholding.
Obviously, the usual direct rollover would have been preferable and the plan is required to offer that option.