401k direct rollover and withdrawal.

I have been trying to give some advice to someone regarding their 401k rollover. The individual is over 55 (under 59 1/2) and was terminated from employment.

She has requested a direct rollover from her 401k to an IRA at her bank. Now she wants to take money from the account because of her ability to w/d money from the 401k under the 55 and over termination rule to avoid the 10% tax penalty.

The check has already be sent, payable to the new institution. I realize that in order for her to get the money from the 401k as a distribution it would best for tracking purposes to request the check be cancelled and have new checks issued, 1 for the distribution and the requested withholding and another for the remaining transfer amount.

However for simplicity. What other options are available. Should the bank be willing, could she simply deposit part of the funds to her IRA and the amount she wishes to distribute directly into her checking/savings as well as any amount she wishes to withhold. I know neither the bank nor the old 401k trustee will send tax paperwork so she would need to maintain records of the the transfer amounts and deposits, then record and pay the difference at tax time.

I don’t believe she has the ability to deposit the funds into her new IRA then take the withdrawal and still avoid the penalty although that would be cleaner at tax time.

Any other recommendations to transfer part of the funds as they are and distribute the rest under the 10% penalty exemption?

Thanks.
EF

PS. The old trustee does allow partial distributions.



I think I would send the check back (if they’ll take it) and start over.



That was my original thought…I have done some checking and the old trustee will not reissue checks as it changes the payee. That would have been best. I think the only way it can be handled at this point is to do a partial deposit into the IRA and claim the other was never deposited and was a distribution directly from the 401k as it never made it into the IRA. However I don’t know what forms she has filled or how the check was paid and it may not allow for this either.

Unless there is another option someone can provide I will recommend they speak with a CPA regarding such action.



[quote=”[email protected]“] I think the only way it can be handled at this point is to do a partial deposit into the IRA and claim the other was never deposited and was a distribution directly from the 401k as it never made it into the IRA.

[/quote]

That won’t work efrey. Since the transaction was processed as a direct rollover—made payable to the IRA, the entire amount must be deposited to the IRA ( Bank rules, as well as tax reporting rules). It is too late to use the age 55 exception at this point. The IRA rules now apply.



Depending on the amount needed from the IRA prior to age 59.5, a 72t plan may be a viable option to avoid the early withdrawal penalty, even though it must be exactly adhered to for 5 years since she is over 55.

Hopefully, there was not an NUA opportunity lost here as well as the ability to get periodic penalty free installments directly from the plan until age 59.5, when the transfer should have been executed.



I agree with Denise on this situation ;once the check is cashed the registration is now in an IRA and any subsequent distributions until age 59 1/2 will generally be assessed the 10% penalty .

There may be another solution depending on the cooperation of the administrator /trustee of the 401 K Plan. I had a similar situation 3 or 4 years ago with one of my clients. It’s a little messy but may work.

There is a good chance that the check is made payable to both client and new trustee . (Even if payable only to new trustee this approach may work ). Notify the new trustee not to cash the check and let the check go stale. There is generally a 90 day period before the check can be reissued . After 90 days, or whatever period, contact the administrator and request the 2 checks ,one for the new IRa and one for the partial distribution from the 401 K

Your client needs to be proactive on this by contacting the administrator right away and see if they will accept this approach . In the case of my client the administrator was the one that suggested the strategy.



I believe it was not made payable to both….simply a FBO as it was a direct rollover. I believe Denise is correct I received a fax with the request for transfer and because of the type of request the original trustee will have already coded it as a rollover and unless for some reason their system allows them to change it, which reading their disclosures I highly doubt, the owner has likely made a foolish decision by not seeking help when filling in the paperwork to a cost of 10%.

Thanks for all your help. Now that I can see her paperwork it is pretty clear. I believe she will not take the advice of her accountant and not take the funds but sometimes we make foolish mistakes.

Thanks again.



As mentioned previously I too agree with Denise but you still may have the option I outlined available to your client . I think you may be giving up to easily . If your sucessful in getting them to in affect “redo this transaction” you will more than likely receive 2 separate 1099 R’s ,one for the distriburtion from the 401K and the other for the trustee to trustee transfer from the 401K to the IRA.

It might warrant a phone call to the 401 K administrator. Your client has a lot to gain (avoid 10% penalty ) and nothing to lose except a $.10 phone call .



cotopop,
Sorry I was not ignoring your suggestion. I did check the possibility but the only option they gave was to change the name of the new trustee to another trustee. No check to her. The check was made payable to the new trustee alone and simply had further crediting instructions to her account number.

Thanks though.



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