Witholding Taxes and rollovers from retirement plans

Witholding Taxes

When you request a distribution from your qualified retirement plan such as a profit sharing plan or 401k, the tax code requires that your plan withhold 20% in taxes.  This really messes things up if you planned on rolling over the money since now you have to come out of pocket for the withheld 20%.

For example, lets say you requested $10,000 from your qualified plan.  The plan withholds $2,000 and gives you $8,000.  If you planned on putting all the money into a new IRA or qualified plan, you are going to have to come out of pocket for the $2,000.  If you don't, come tax time you are going to have to pay taxes on the withheld $2,000.

Then again, maybe you aren't.

As I discussed in yesterday's post, the IRS has a procedure to allow you to fix a failed rollover.  If the IRS feels that you it wasn't your fault, they have the ability to say that if you contribute the failed rollover money within 60 days you won't owe any taxes.

In a IRS ruling released today they allowed a taxpayer, who didn't contribute the withheld money within 60 days, a second chance.  The ruling said that if the taxpayer put the withheld amount into a retirement account within 60 days, they wouldn't have to pay taxes on the withheld amount.

Bottom line, if you find that at the end of the year you have a tax hit because you didn't contribute the withheld taxes on your rollover this ruling could save you a few thousand dollars.