Level 4

Question

401k distribution deposited back to IRA

Forum|Forum|4 years ago
March 27, 2022
3 replies
30 views

Client receives a small (~$ 250.00) distribution from 401k each year,. He does not have enough $$ in the account for the account trustee, so Fidelity sends him a distribution check with taxes withheld. He deposits the gross amount into his IRA right away (he makes up for taxes withheld to equal the full amount of the distribution).

How should I treat this distribution? Client insists its a rollover.

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sjrcpa

Level 15

RMDs can't be rolled over.

But it can be an IRA contribution if he is otherwise qualified to make one.

If he's not, it's an excess IRA contribution. There are penalties for that.

The more I know the more I don’t know.

George4Tacks

Level 15

I don't read this as a RMD, so assume everything is done timely (60 days) this does sound like an indirect rollover.

Answers are easy. Questions are hard!

sjrcpa

Level 15

Small annual distribution made me think RMD, but we don't have enough info to know.

The more I know the more I don’t know.

qbteachmt

Level 15

"He does not have enough $$ in the account for the account trustee"

Which Account is this, and which trustee is this, and what is the trustee needing money for, that isn't available elsewhere? Too many pronouns and not enough direct specifics to follow.

How old is he? Is he still working for that employer, who has their 401(k) plan administered by Fidelity?

If this is an IRA fee, why would you owe a fee when there is "not enough money?"

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L

laval650Author

Level 4

Thank you very much to all who replied.

The client is "young", in his late 50th, so it's not RMD. He works for this employer part time, so the amount he contributes is very small, and Fidelity does not want to deal with this and just distributes the money (as a check, with federal and state taxes withheld) in December. The client then turns around and deposits the whole amount (adding the taxes withheld) to a Schwab IRA. To add to the difficulties, he also has a 401K at his other job, and his income does not allow for a deductible IRA contribution in 2021.

I hope it brings some clarity to the questions, and I hope I will find the solution with your help.

qbteachmt

Level 15

First, there are some provisions where "late 50s" can be getting distributions, and 401(k) rules are different than IRA rules, and it matters if you still work for the employer or not. So, those are three things to read up on.

There is no reason to contribute to an employer retirement plan, just to have it distributed back to you. You mention there is another 401(k) at another job. Does someone monitor the big picture?

"Generally, you aggregate all elective deferrals you made to all plans in which you participate to determine if you have exceeded these limits."

Yes, you can go from 401(k) to IRA as rollover (meeting the timeliness requirement). If the payment went directly to his IRA account, there would be no fiddling with withholding and gross-up requirements. Because this: "adding the taxes withheld" is not Taxes Withheld. It's just Withholding, against any potential tax balance owed from 1040.

"and his income does not allow for a deductible IRA contribution in 2021"

"and Fidelity does not want to deal with this and just distributes the money (as a check, with federal and state taxes withheld) in December."

I'm pretty sure Fidelity cannot do this without his agreement, or at least, the plan administrator's. Fidelity cannot initiate this. I wonder if this isn't the action of a specific broker.

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