Rollovers and Tax Withholding

Rollovers and tax withholding

A client recently explained 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. Does the plan sponsor need to issue another check for the 20%?

No. Instead of requesting a trustee-to-trustee transfer or “direct rollover,” this client had requested a distribution of eligible funds from his qualified plan (paid directly to him). When a distribution is made, the plan sponsor is required to withhold 20% for federal income tax purposes (state withholding may also be applicable).

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 the second option, he will also owe a 10% early distribution penalty on the taxable portion not rolled over to the IRA because he is under 59½ years old and no other exception applies.

What is the moral of this story? 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 expert for assistance, retirement distribution planning is a FREE service and (s)he is available to help you!

More Updates


For trusts that inherited an IRA in 2019, an important deadline is approaching. The due date to provide required trust documentation to the IRA custodian to ensure that the longest payout period possible is available for the inherited IRA is October 31, 2020. Generally, only individuals who are named on an IRA beneficiary form can

Read More »


The coronavirus-related distribution (CRD) rules for Roth conversions have a gaping hole. An “affected person” (as we have defined in previous blogs), is entitled under the CARES Act to withdraw up to $100,000 from their IRA or workplace retirement plan. A CRD avoids the 10% early distribution penalty for those under 59 1/2, can be

Read More »

Rolling Over an RMD

Like most people’s lives, the retirement world is upside down. This is made evident by a single statement: “Required minimum distributions (RMDs) can be rolled over.” Yes, that is the new normal—at least for this year. RMDs are considered the first money out of an IRA and workplace plan. Typically, these dollars are ineligible to

Read More »
Scroll to Top