Retirement Planning/401K distribution reversal
Dear Mr. Brumbaugh,
I got a 401K distribution check with 20% tax withhold from Schwab by mistake and trying to reverse the distribution. The original attention is just rollover the 401K balance to an IRA account. I was told by Schwab this distribution is not reversible after they distribute the check. I need an advise what option I have? I am not 59 1/2 yet.
1. Can I deposit the check to an Roth account? consider I do a conversion to Roth for the 401K account so I pay the necessary tax now including the 20% already been withhold to IRA.
2. Deposit the check to an IRA account so at least I don't get tax on the 80%. Can I out of pocket deposit the 20% to the IRA account and get the 20% tax withhold back after file tax return?
You are correct in your suggestion of taking out of pocket (other previously taxed funds) to submit to the IRA. But you must do this quickly. Otherwise, not only will you be taxed on the 20% withheld, you will also be subject to the 10% Premature Distribution Penalty.
Food for thought:
In all likelihood, your family is dependent on your income. If you were to pass away, your family would need to tap the IRA. They could lose 1/3 of the account to income taxes. There is a way to transfer funds from IRAs to life insurance prior to age 59 1/2 without the PDP, thus doubling what you would have left behind.
Willard R. Brumbaugh, LUTCF
CA License 0374776