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.
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
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