60 day rollover

[jjbook0242]

My client took full distribution from his deceased wife's 401k and had withholding taxes held out.  The check was sent directly to him and deposited into his bank account.  The next day he transferred the money minus the withholding taxes into an IRA with Merrill Lynch.  He did not repay the taxes.  He is calling this a 60 day rollover.  He did not receive any forms from Merrill Lynch.  Is this correct and should he have received any forms showing this was a rollover. Right now, with the 1099-R from his wife's employer is showing to be fully taxable.

[sjrcpa]

It's an indirect Rollover.

The 1099-R is correct. $xx was distributed. Payor has no idea what happened after.

[TaxGuyBill]

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@jjbook0242 wrote:

Right now, with the 1099-R from his wife's employer is showing to be fully taxable.

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Report it as a rollover.  On the 1099-R worksheet, keep scrolling down until you see the section about rollovers, then fill that out.

[qbteachmt]

By not making up the shortfall, he is going to see the 1099-R for the money out as the tax withholding you mention "He did not repay the taxes" and Merrill Lynch is going to issue a Form 5498 for the year of the deposit, for money In. That form usually isn't issued until mid-May. It's just informational and not used for taxes. It's your due diligence that he did what he is telling you.

"Right now, with the 1099-R from his wife's employer is showing to be fully taxable."

Because the entity in charge of issuing the money doesn't know what else he did. That's correct. You address it when you enter it for the tax year.

[jjbook0242]

I entered the the amount that he received on the rollover section of the 1099-R worksheet.  Now the amount of the federal withholding taxes is showing taxable on the 1040, Line 5b and he is receiving a refund for the amount of the withholding taxes.  Is this correct?  Also, going forward would this be a non taxable IRA?

[sjrcpa]

Yes it's correct. He didn't roll over the part attributable to withholding tax, so that part is taxable.

No this is not a nontaxable IRA. He did a tax free rollover from the 401(k) to an IRA. 

[BobKamman]

 "He did not receive any forms from Merrill Lynch."

He will receive one, a Form 5498, but not until May, when he will call you and ask you what to do with it.  You will tell him to keep it handy in case IRS asks about the rollover.  

Some of these rollovers of an inherited IRA have to be done trustee-to-trustee, which at least eliminates the tax withholding.  Apparently there is an exception when the spouse is the beneficiary.  But he could have avoided paying tax on the withholding by doing it the easy way.  Now his return is going to look suspicious because of the high ratio of withholding to AGI.