You Asked Us - Rollovers and Transfers

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

A: No. Generally, when rollover eligible assets are distributed from a qualified plan, 403(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) to the federal government 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. The amount that is timely rolled over will be tax and penalty free.

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