401k and IRA Rollovers

[susieq]

Facts:

TP under 59 1/2
Transferred his 401k Fidelity accounts to a Fidelity IRA account in May of 2008.

He wants to take $25,000 out of his IRA and then put it back within 60 days.

Can this transaction take place without tax and penalty? Would this transaction fall under the 12 month rule regarding only one rollover transaction in a 12 month period?

[Snaggletooth]

Withholding

Susie from Michigan, I think this would work, except the payer would be required to withhold $5,000 from the $25,000. Once withheld, the money would go to the IRS.

If he then restores $25,000 to the IRA, he would have to include $5,000 of his own money.

I don't think the payer is allowed to forego withholding if the taxpayer is under 59½.

Ironically, I've had this same question (different amounts) a number of times. They wanted me to tell them there would be no taxes, so they could justify buying a car, adding a room, whatever they wanted to spend. On only one occasion did the taxpayer return the money to the IRA. After so many years in this business, you get to know human nature, spending habits, etc. When next April 15th rolled around, ..."well we forgot to put it back" "the room ended up costing us more than we thought"...."my kid got sick"...in most cases it is simply a matter of having money available and not being able to leave it alone.

Of course, don't approach your client this way -- always take them at their word at the start. Just make sure you effectively communicate. Then, in the back of your mind simply make a mental note, and when their tax time rolls around next year, see what happens.

[Bees Knees]

Withholding is not required if it is a direct transfer from the 401(k) to the IRA.

Withholding is never required if it is a distribution from an IRA.

And no, the one rollover per 12 month limit does not apply to the direct transfer from the 401(k) to the IRA.

Therefore, yes, your client can do a direct transfer from the 401(k) to the IRA, then within 12 months of that transaction, take a distribution from the IRA, then put the money back into the IRA within 60 days, with no tax or penalty.

[susieq]

Responses for 401k to IRA/withdrawal question

Thanks for your responses. The tp already had the 401k funds transferred - no withholding on that transaction. He checked with Fidelity and they told him that he could opt out of having tax withheld from the IRA distribution.

I was just very concerned that the transfer from the 401k would eliminate the possibility of a withdrawal from the IRA within the 12 month period. Thanks Snaggletooth and Bees Knees for your info.