A client had complained that his 401(k) plan sponsor made an error and withheld 20%
for taxes when all he did was “rollover” the 401(k) funds to an IRA. He then asked if the
plan sponsor needed to issue another check for the 20%.
The answer in this case is no. The problem was, instead of requesting a trustee-to-trustee
transfer or “direct rollover,” this client requested a “distribution” of eligible funds from
his qualified plan and the money was paid directly to him. For distributions, the plan
sponsor is required to withhold 20% for federal income tax purposes (state withholding
may also be applicable) so an error was not made by the custodian.
He can still rollover the amount he received into an IRA, but he will need to make up the
difference out of pocket within 60 days of the distribution to complete a timely rollover.
Another option is to treat that 20% as ordinary taxable income on his tax return.
However, if he chooses this second option, this client will also owe a 10% early
distribution penalty on the taxable portion not rolled over to the IRA because he is under
591⁄2 years old and no other exception applies.
The lesson here is to make sure you fill out your retirement plan paperwork correctly if
you want to move your retirement funds tax and penalty free. Don’t be afraid to ask your
personal retirement distribution planning specialist or tax professional for help!

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