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IRA rollover rules


Dear Tax Talk,
I liquidated a 401(k) a couple months ago, roughly $260,000. I sent $150,000 from custodian to custodian and the remaining dollars ($110,000) were sent directly to me, less 20-percent withholding. I have another IRA account established, but do not have the $22,000 to send to the new custodian. What recourse do I have to avoid penalty and ordinary income tax liability? I'm making a good faith effort to move funds over to another custodian within the 60 days. Please advise as to any possible action I may be able to take. Thanks. -- John

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Dear John,
A good faith effort, while good, isn't going to avoid the tax and penalty unless you make up the other $22,000 before the 60 days are up. When you take a direct distribution from a pension plan, the payer is generally required to withhold 20 percent and send it to the Internal Revenue Service. You receive credit for the amount withheld when you file your individual tax return for the year of distribution.

Since you have only 60 days from the distribution to roll over the full amount distributed including the tax withheld, you need to dip into other funds in order to make up the shortfall for the taxes withheld.

If you can borrow the money (think a HELOC or a relative), then you can use the refund on your individual return to repay the amount borrowed. Any part of the shortfall that you make up means that much less on which you'll incur tax and penalty. For example, if you manage to get $100,000 into the rollover account before the 60 days are up, you'll only incur tax and penalty on $10,000.

-- Posted: Sept. 15, 2004




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