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March 3, 2009

Should taxes withheld from a distribution that is rolled over be refunded to me?

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Should taxes withheld from a distribution that is rolled over be refunded to me?

I received $100,000 in rollover eligible assets from my 401(k) account, but I had the amount paid to me. My plan administrator withheld 20% for federal taxes, so I received only $80,000. I want to rollover the entire $100,000. Should my plan administrator refund the amount they withheld for taxes to me?

Question

I received $100,000 in rollover eligible assets from my 401(k) account, but I had the amount paid to me. My plan administrator withheld 20% for federal taxes, so I received only $80,000. I want to rollover the entire $100,000. Should my plan administrator refund the amount they withheld for taxes to me?

Answer

No. Generally, when rollover eligible assets are distributed from a qualified plan403(b) or 457(b) plan to the plan participant, instead of as a direct rollover to an eligible retirement plan, the payer must withhold 20% for federal income, and if applicable, any state withholding tax. This amount that was withheld should be remitted ( by the payor- your plan administrator ) to the IRS as an advance payment of taxes on your behalf.

If you want to rollover the entire distribution amount of $100,000, you will need to make up the amount withheld for taxes out of your other savings. Alternatively, you may rollover only the $80,000 and treat the $20,000 as a regular distribution, which must be treated as a ordinary income on your tax return; if you were under age 59 ½ when the distribution occurred, you will owe the IRS an early distribution penalty of 10% on any taxable portion that was not rolled over unless an exception applies.

The withheld taxes will either increase your tax refund or reduce taxes you owe when you file your tax return for the year. The rollover must be completed within 60-days of you receiving the distribution, in order to be considered a valid rollover. The amount that is timely rolled over will be tax and penalty free.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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