Advanced Underwriting Consultants

Question of the Day – February 29

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Here’s the question of the day.

Question: My client took an IRA distribution, 10% of the distribution was withheld for taxes, and now my client wants to do a rollover.  How do we proceed?

Answer: Suppose the client requested $10,000 and the IRA custodian withholds 10% ($1,000) and sends a check for $9,000 balance.  This situation generates several questions and issues.

1. First, is it possible to go back to the custodian return the check, tell it you want to do a rollover, and undo the withholding?  No, when money is withheld for income taxes, the institution must forward it to the IRS immediately.  Once the check is written, it is too late to back it out.

2. What if the net amount received, $9,000 in the example, is rolled over?  In that instance, $9,000 would be the amount of the rollover, and the amount withheld for taxes, $1,000, would be considered a taxable distribution.  The distribution is subject to income taxes and the penalty tax if the client is younger than 59 ½.

The taxpayer would report an extra $1,000 of income on his or her tax return, but the $1,000 withheld would be available as a credit against total taxes due.  If no taxes or penalties are otherwise due, then a refund of the $1,000 may be requested.

3. Can the taxpayer make up the $1,000 withheld from personal funds, and deposit the entire $10,000 in another IRA?  Yes, $10,000 can be rolled over.  In that case, no taxable income for the year is reported, and the $1,000 withholding may be requested as a refund on the tax return, assuming no other taxes are owed.

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