@fanfare wrote:
it's not tax and penalty free if the employer withholds tax
the employer should not withhold any tax if they are closing out your 401k.
I'm not clear if the regulations always require withholding, but;
If, for example, the distribution is $1000 and the employer withholds 20% backup withholding, so the employee gets a check for $800, the employee must nevertheless deposit $1000 in the new IRA to consider the rollover to be completed. Then, there would be no penalty. Tax would be owed if the rollover was into a Roth but not if it was into a traditional IRA. If the withholding is more than the tax, the difference gets added to the persons tax refund.
However, if the employee only deposited $800 in the new IRA, then it would count as an $800 rollover and a $200 taxable withdrawal. The employee would pay tax and a penalty on the withdrawal amount, and would only pay tax on the rollover amount if it was to a Roth IRA.
