Submitted by iguesswhatevs t3_11ec2gd in personalfinance
This is in relations to yesterday’s post
I just got my check and the amount showing is with the federal taxes deducted. Many of you said I can roll it over into another 401k to avoid the taxes but how do I do that if the taxes have already been taken out?
Edit: what if I just put it into my personal Roth IRA since the taxes have already been taken? And then select 2022 rolll over instead of 2023 contributions? Can I do that?
What do you mean deposit it should be? I can deposit, say, $1000 if there’s only $790 on the check.
Since I already paid taxes on it, what if I just put into my personal Roth IRA and select 2022 roll over?
> What do you mean deposit it should be? I can deposit, say, $1000 if there’s only $790 on the check
You write a check for $1000 to the IRA custodian as an indirect rollover
>Since I already paid taxes on it, what if I just put into my personal Roth IRA and select 2022 roll over?
Then you still pay penalties on the amount withheld
I’m so confused. So you’re saying that, say I have $1000 and I pay $210 or 21% in federal taxes, I still have MORE penalties to pay?
Becuase my check basically shows the $790. And if I already paid my taxes then what else do I still owe?
Yes. If you don't rollover/convert the full balance ($1000), you pay penalties on whatever amount was withheld. In this case, its $21, but still, that's $21 you don't need to give away
Wait so $21 on top of the $210 or a total of $231 and where did you get that number?
Depends on your income. You could owe more than 21% in just taxes depending on your state. But if you don't "make up" the $210 in your rollover, you will owe a penalty on that $210
I had this same thing happen to me and it sucks, but you need to come up with your own money to make everything whole from a tax deferred standpoint. It would all work out in the end, but it's an annoying cash flow issue. There were some articles online that explained it thoroughly.
People gave their advice here. I gave mine on the original post.
Please don’t take any offense to this, but it sounds you are in over your head. And that is fine. We all have to learn and this type of thing can be overwhelming.
Given this I would get in contact with the institution that is managing your Roth IRA. If you want to go with someone else I suggest Fidelity or Vanguard.
The rep should be able to guide and educate you in your options on how to rollover your funds. Also in particular how to recover your withheld taxes. They are equipped to do this since it is their profession. Much of it will just be what many of us are sharing. But talking to a person over the phone and having them be your side to have a shorter feedback loop can be what you need to get this done confidently.
This is an indirect rollover. You need to redeposit the whole distribution amount within 60 days despite taxes being taken out (If your balance was 10,000 but your check is 8,000, you still need to deposit 10,000). Then you should receive the taxes that were withheld in your tax refund for next year.
What if I just deposit that as a rollover into my personal Roth IRA? People are saying I still need to pay more penalties which I don’t understand. If the balance was 10k and the check is 8k, then I already paid my federal taxes. What other penalties do I still owe??
[deleted]
401k has a 10% early withdrawal penalty. So you'd pay taxes at the base rate (and may owe more, they don't know what your total income will be) so in the numbers you gave as an example you were taxed 20%, but your tax obligation may be 24% for instance, so you'd owe an additional $400 in that case PLUS the early withdrawal 10% penalty on the amount not rolled over if you don't roll all the money into a tax deferred account. So again using 2,000 in this example you'd owe $200 in penalties. In total you'd owe $2000(base tax)+$400(actual tax rate difference)+$200(early withdrawal penalty)=$2600. I think you're confusing taxes with penalties when they're two separate things and additive in this case. If you put the gross $10,000 back into a trad IRA or 401k then you owe no taxes and no penalties, you'll be refunded come tax time.
You don't need to pay more penalties most likely. You just need to do the indirect rollover correctly.
You can contribute to a Roth IRA assuming you have earned income but this has nothing to do with your 401k check.
Find out what the gross distribution amount is. There should be a "distribution statement" that came with the check.
Contact your traditional IRA provider or your current 401k provider and ask them how to deposit an "indirect rollover". You either
Send the check(s) and a copy of the distribution statement to the traditional IRA provider or current 401k provider.
(Yes, you are paying the difference out of pocket for now, but you'll get the withheld tax refunded when you file (1 year from now).)
>Edit: what if I just put it into my personal Roth IRA since the taxes have already been taken? And then select 2022 rolll over instead of 2023 contributions? Can I do that?
You still have to rollover the gross distribution to avoid the 10% penalty. This is not much different from rolling over to traditional IRA, with the exception that you'll be paying taxes on the rollover.
> Edit: what if I just put it into my personal Roth IRA since the taxes have already been taken? And then select 2022 rolll over instead of 2023 contributions? Can I do that?
I don't recommend doing this. For one thing, it probably doesn't make sense to do a Roth conversion unless you are in a particularly low income year.
For another thing, even if you do decide to do a Roth conversion, it's better to pay the taxes from pocket rather than an IRA withholding. IRA contributions are limited and you are reducing future growth by dipping into your IRA to pay the taxes. And if you are below retirement age, withdrawing from your IRA to pay taxes is actually a non-qualified withdrawal and you'll be penalized for that.
The easiest thing to do is to roll the entire amount into a Rollover (Traditional) IRA, including the amounts that were withheld for taxes and penalties. If you decide to do a Roth conversion at some point down the line, make that a separate distinct decision.
If you want a $0 taxable event for this, the only solution is to take the full gross amount and place it into a Traditional IRA, coded as indirect rollover (not contribution).
You replace the 20% with your own money. Then you get the withholding back next year when you file.
So if it was $1000 and you netted $800, come up with the extra $200 yourself and put $1000 into the IRA as a rollover. Then you get the $200 that went to the IRS back next year.
Pretty much everything else you're suggesting either still make this a taxable event, and/or still include the 10% penalty.
What you’re not getting is that the taxes they took out are not permanent: you can get them back if you do the rollover for the original amount. If you don’t, then you’ll owe taxes on the part that’s missing - ie, the amount they took out to withhold. The amount you’ll owe is less than what they withheld, so you’ll still get some back, but not all.
If the original total was 1000, and they withheld 200, and you deposit 1000 into an IRA or 401k, then you’ll get 200 back from your regular tax return next year.
If you deposit 800 into an IRA or 401k, then you’ll owe (200*30%) or thereabouts, so $60, and get back 140 in your tax return next year. But that’s $60 less than you would otherwise get back.
You need to fork over the withheld taxes into the IRA to avoid being taxed and penalized on the tax withholdings. You'll get the taxes back when you file your tax return. You may want to adjust your W-4 to effectively get the money back sooner.
You deposit this check in your bank account, then you write a new check for this amount + the missing taxes and deposit that into your new 401k or IRA as a rollover within 60 days. Then when you file your 2023 tax return you’ll be credited for the withheld taxes, which will reduce the amount you owe or increase your refund by that amount.
Read my edit and see what you think
> Edit: what if I just put it into my personal Roth IRA since the taxes have already been taken?
20% is the default withholding. You may end up owing tax at a higher or lower rate than 20% based on how much overall income you have this year. You can make more than one deposit as part of a rollover. You could deposit this check and then also deposit a second check to make up the missing 20%. As long as you indicate that both deposits are part of a rollover, it’s fine. If you only deposit this check but not the missing 20%, then the missing 20% will be further subject to an early withdrawal penalty when you file your taxes.
> And then select 2022 rolll over instead of 2023 contributions? Can I do that?
You don’t have to select a year for a rollover
Wait so I’m being taxed on the 20% that has already been taxed?? I don’t understand that. The 21% is just federal taxes withheld from me
If you are under age 59.5, any money that leaves a retirement account and does not enter another retirement account is subject to the 10% early withdrawal penalty.
Withholding is just a prepaid estimate of tax. Your actual tax may be higher or lower, depending on other factors.
So what you’re saying is that 21% federal income tax PLUS 10% withdrawal fee?
You would pay 10% additional tax on the amount that was withheld and not rolled over
You may find these links helpful:
I am a bot, and this action was performed automatically. Please contact the moderators of this subreddit if you have any questions or concerns.
Werewolfdad t1_jad39k1 wrote
>Many of you said I can roll it over into another 401k to avoid the taxes but how do I do that if the taxes have already been taken out?
You deposit the full amount it should be and claim the withheld taxes on your tax return as a refund