401k distribution deposited back to IRA

[laval650]

Client receives a small (~$ 250.00) distribution from 401k each year,.   He does not have enough $$ in the account for the account trustee, so Fidelity sends him a distribution check with taxes withheld.  He deposits the gross amount into his IRA right away (he makes up for taxes withheld to equal the full amount of the distribution). 

How should I treat this distribution?  Client insists its a rollover. 

[sjrcpa]

RMDs can't be rolled over.

But it can be an IRA contribution if he is otherwise qualified to make one.

If he's not, it's an excess IRA contribution. There are penalties for that.

[George4Tacks]

I don't read this as a RMD, so assume everything is done timely (60 days) this does sound like an indirect rollover. 

[sjrcpa]

Small annual distribution made me think RMD, but we don't have enough info to know.

[qbteachmt]

"He does not have enough $$ in the account for the account trustee"

Which Account is this, and which trustee is this, and what is the trustee needing money for, that isn't available elsewhere? Too many pronouns and not enough direct specifics to follow.

How old is he? Is he still working for that employer, who has their 401(k) plan administered by Fidelity?

If this is an IRA fee, why would you owe a fee when there is "not enough money?"

[laval650]

Thank you very much to all who replied.

The client is "young", in his late 50th, so it's not RMD.   He works for this employer part time, so the amount he contributes is very small, and Fidelity does not want to deal with this and just distributes the money (as a check, with federal and state taxes withheld) in December.   The client then turns around and deposits the whole amount (adding the taxes withheld) to a Schwab IRA.  To add to the difficulties, he also has a 401K at his other job, and his income does not allow for a deductible IRA contribution in 2021. 

I hope it brings some clarity to the questions, and I hope I will find the solution with your help.

[laval650]

A special "thank you" to George from a Ukrainian!   

[qbteachmt]

First, there are some provisions where "late 50s" can be getting distributions, and 401(k) rules are different than IRA rules, and it matters if you still work for the employer or not. So, those are three things to read up on.

There is no reason to contribute to an employer retirement plan, just to have it distributed back to you. You mention there is another 401(k) at another job. Does someone monitor the big picture?

"Generally, you aggregate all elective deferrals you made to all plans in which you participate to determine if you have exceeded these limits."

Yes, you can go from 401(k) to IRA as rollover (meeting the timeliness requirement). If the payment went directly to his IRA account, there would be no fiddling with withholding and gross-up requirements. Because this: "adding the taxes withheld" is not Taxes Withheld. It's just Withholding, against any potential tax balance owed from 1040.

"and his income does not allow for a deductible IRA contribution in 2021"

"and Fidelity does not want to deal with this and just distributes the money (as a check, with federal and state taxes withheld) in December."

I'm pretty sure Fidelity cannot do this without his agreement, or at least, the plan administrator's. Fidelity cannot initiate this. I wonder if this isn't the action of a specific broker.

[laval650]

Thank you for your replies.

My plan is to record a distribution from this 401K plan as a regular distribution, with taxes withheld and such, and then record a contribution to a traditional IRA (non-deductible in his case).

I agree, it does not make any sense to contribute to an employer plan just to receive the distribution the same year and then deal with the tax return, F. 8606 and such.

Again, thank you to all who took time in this busy time of year to respond

[qbteachmt]

Just to clarify, then: "and then record a contribution to a traditional IRA (non-deductible in his case)."

Now you are confusing Contribution and Rollover.

Contributions can be deductible or not. Rollover is never deductible because it is not new money; it is moved money. And it is allowed to carry with it the same treatment as the "from" account when it is Deferred to Deferred.

If you want to treat it as a contribution, you would not need to gross it up, because this scenario is: I wanted to make a contribution and instead of selling lemonade to raise the money, I used money that already came to me another way. In this scenario, where it came from has nothing to do with the function of contribution.

[laval650]

Now I think I know how to account for the taxes withheld in case of a rollover.   I will report "gross", box 1, report all the taxes withheld, and then "G" for the code and nothing for "taxable amount", box 2a.

But the question remains:  what to do with the amount already grossed up?  He probably should withdraw the excess(taxes) before the due date of the return.

[qbteachmt]

"I think I know how to account for the taxes withheld in case of a rollover."

You told us he Grossed up his deposit.

"I will report "gross", box 1, report all the taxes withheld, and then "G" for the code and nothing for "taxable amount", box 2a."

Only if that got Rolled over per the definition of Rolled over.

"But the question remains: what to do with the amount already grossed up? He probably should withdraw the excess(taxes) before the due date of the return."

It's only excess if he put in too much as Contribution.

Once again:

Did your taxpayer Roll Over, or make a Contribution?

Rollover is the movement of money. It is not taxable, there is no such thing as Excess, it is not limited.

Or:

Contributions are based on earned income, on age, may or may not be tax deductible (the opposite of taxable), depending on the retirement or employer plan and account there might be matched funds, there are contribution limits and eligibility and qualifications, etc.

Look: you don't seem to be the preparer that did this last year, but you told us: "and Fidelity does not want to deal with this and just distributes the money (as a check, with federal and state taxes withheld) in December. The client then turns around and deposits the whole amount (adding the taxes withheld) to a Schwab IRA."

So, what is the activity? Look at last year. Is it supposed to be handled the same way?

And it's time to take some continuing ed on retirement account and benefit plans.

[laval650]

It's a distribution eligible for a rollover. Not a direct one.  The client insists it's a rollover, I will record it as such.   Since the client added his own funds to compensate for the withheld taxes, and this money is not technically a rollover, what to do with the excess rollover?

[George4Tacks]

DO NOT USE CODE G. That would be on the 1099R if it were appropriate. It does sound like you have an indirect rollover. Enter the 1099R just as it is printed, then follow the hints in this picture to enter the amount that was indirectly rolled over.

[laval650]

There is no 1099R, the amount is ~ $ 200, so Fidelity did not bother.  They issued a check.

I really appreciate your help.  Thank you.

[laval650]

I followed your advice, and in this scenario the client loses ~ $ 53 of taxes withheld.  Is there any other place I can enter these taxes?

[qbteachmt]

"Since the client added his own funds to compensate for the withheld taxes, and this money is not technically a rollover, what to do with the excess rollover?"

Yes, it is part of the Rollover. If he only made up the difference between Gross and Net, all he did is make the Rollover match the distribution, which is allowed.

"60-day rollover – If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan (see below), so you’ll have to use other funds to roll over the full amount of the distribution."

From: https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-...

But these should be happening direct or Trustee-to-Trustee. You can only do this once each 365 days. Not per calendar year, but literally by count of days.

[George4Tacks]

Did you enter the total gross distribution = net plus the withholding?

The withholding should still carry to the return. 

[rbynaker]

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@laval650 wrote:

There is no 1099R, the amount is ~ $ 200, so Fidelity did not bother.  They issued a check.

I really appreciate your help.  Thank you.

---

Of course there's a 1099-R.  The threshold is only $10.  As ERO you're required to enter it.

[qbteachmt]

"Of course there's a 1099-R."

That doesn't mean the taxpayer bothered to keep it or get it from online.