Interesting Problem with a Rollover

[dyne]

A client advised that he rolled over the entire amount reported on a form 1099-R.
The gross amount was $20,000 but the 1099-R reported $4,000 federal tax withheld.
This was NOT a direct rollover or Trustee-To-Trustee rollover so he could NOT have
rolled over the entire $20,000 unless he borrowed $4,000 as he received a check
in payment for only $16,000 ($20,000 less $4,000 federal tax withheld). He actually
only rolled over the $16,000 which he received. He should have either left the retirement
money with his employer or made a trustee-to-trustee rollover, which he did not do. In this
case the $4,000 which was not rolled over because it was withheld for federal tax WAS
taxable and subject to the 10% penalty.

[okie1tax]

Rollover

IF he added the $4,000 from another source of funds, bank account, cashed a CD, etc., he still did the full $20,000 rollover.

[FEDUKE404]

Common problem

I see this stuff all of the time.

Client tells me he "rolled over everything" (namely the check amount after a frequent 20% federal withholding) and gets a surprise at tax time for the withholding taxes portion of the distribution, as shown on the Form 1099-R, that was not rolled over.

I always tell a client anticipating a rollover to use the institution to institution transfer ("don't touch the money!!"), but sometimes that horse is sadly already out of the barn.

FE

[BP.]

Yes, not uncommon. One other problem I find when the client rolls over a distribution they get (as opposed to a direct transfer to the new trustee) is that the client gets a tax bill for the distribution as a result of the code 7, and then has to respond with proof for the rollover contribution.

This happens even though the Form 5498 shows the rollover, and even though I've sent documentation with the paper return or an electronic note with the efile. I keep copies of the rollover contribution paperwork, knowing I'll likely need it in another year or so.

Just finished with one from TY 2008 that had 3 separate distributions (1099-R's) and then about 9 rollover contributions into various banks. Would've been a pain (and clients can be forgetful about these transaction details) if I hadn't already had the copies.