How do I handle a roll over check from 401k I did not deposit

[macuser_22]

Do you nave a 1099-R for the distribution?  What code is in box 7?

[ingrid-kavic]

No, no 1099-Rs from either distributor or intended account, as husband lost it but has since found however it's past 60 days. I assume we owe since tax on it but I'm not sure what to do?

[macuser_22]

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@ingrid-kavic wrote:

No, no 1099-Rs from either distributor or intended account, as husband lost it but has since found however it's past 60 days. I assume we owe since tax on it but I'm not sure what to do?

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Again what code is in box 7?   If a 1 or 7 then you only had 60 days to complete the rollover or it is a taxable distribution and cannot be put in another retirement account,  but is a code G, then it is a direct rollover from one financial institution to another that does not have a 60 day time limit. If a code G then the check should be payable to the retirement account and not to you.

[ingrid-kavic]

So the check was issued in 2022 so apparently it'll be for next year's taxes, that's why no 1099-R was sent, per the "live guidance" I paid extra for. It is made out to the financial institution, not my husband, so I'm hopeful you're right and no penalty. Thanks for your reply.

[macuser_22]

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@ingrid-kavic wrote:

So the check was issued in 2022 so apparently it'll be for next year's taxes, that's why no 1099-R was sent, per the "live guidance" I paid extra for. It is made out to the financial institution, not my husband, so I'm hopeful you're right and no penalty. Thanks for your reply.

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That should be a "direct rollover" and the 1099-R should have a code G in box 7 when it comes.   There is no 60 day limit for a code G since you do not have access to the money (the check is not made out to you) - it can only be deposited by the retirement account it is made out to.   The only penalty is that you are not getting interest or earnings while you hold the check so deposit it with the retirement account ASAP.

[Opus 17]

@macuser_22 

How can it be a direct rollover if the taxpayer has a physical check in hand?

[Opus 17]

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@ingrid-kavic wrote:

So the check was issued in 2022 so apparently it'll be for next year's taxes, that's why no 1099-R was sent, per the "live guidance" I paid extra for. It is made out to the financial institution, not my husband, so I'm hopeful you're right and no penalty. Thanks for your reply.

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[Edited to add: if the check was made out to the new plan, and not to yourself (or your spouse), then this answer does not apply.  You can still deposit the check into the new plan and the 60 day time window does not apply to you, per the expert answers below.  Do make sure that the new plan knows you want to open a traditional IRA (and not a Roth IRA or a broker account) before you send the check. ]

If you received a physical check from one plan, then you were attempting an "indirect rollover."  You have 60 days to deposit the funds in the new account.  If you miss the 60 day window, the check becomes taxable income, like any other withdrawal.  You will receive a 1099-R in January 2023, and you report the withdrawal on your 2022 tax return.  You will pay regular income tax plus a 10% penalty if you are under age 59-1/2.

There is a loophole to the 60 day rule.  However, this is fairly advanced tax practice, and I suggest you get an accountant to help you qualify.   I will post the information for you to review, but you really should get professional guidance.

Ways to get a waiver of the 60-day rollover requirement.

There are three ways to obtain a waiver of the 60-day rollover requirement.

• You qualify for an automatic waiver.

• You self-certify that you met the requirements of a waiver.

• You request and receive a private letter ruling granting a waiver.

You don't qualify for the automatic waiver, and a private letter ruling has a $10,000 application fee.  You might be able to self-certify that you qualify for a waiver. 

How do you self-certify that you qualify for a waiver?

Pursuant to Revenue Procedure 2016-47 in Internal Revenue Bulletin 2016-37, available at IRB 2016-37, you may make a written certification to a plan administrator or an IRA trustee that you missed the 60-day rollover contribution deadline because of one or more of the 11 reasons listed in Revenue Procedure 2016-47. A plan administrator or an IRA trustee may rely on the certification in accepting and reporting receipt of the rollover contribution. You may make the certification by using the model letter in the appendix to the revenue procedure or by using a letter that is substantially similar. There is no IRS fee for self-certification. A copy of the certification should be kept in your files and be available if requested on audit.

Note.

A self-certification is not a waiver by the IRS of the 60-day rollover requirement. If the IRS subsequently audits your income tax return, it may determine that you do not qualify for a waiver, in which case you may owe additional taxes and penalties.

One of the 11 conditions in Revenue Procedure 2016-47 is "the distribution, having been made in the form of a check, was misplaced and never cashed;" and another condition is the contribution must be made "as soon as practical" after the condition causing the failed rollover is cured. If the rollover occurs within 30 days, that is deemed to be soon enough.

So, one course of action might be:

1. tear up the check

2. call the issuing broker and tell them the check was accidentally lost, and they need to stop payment on the check and credit the funds back to your account.

3. ask the issuing broker to issue a new check, and deposit the new check into the rollover IRA;

4. or better still, ask the issuing broker to perform a direct transfer to the new IRA, without sending you any money (a direct transfer is much safer and is preferred for many reasons.)

Take care of the IRS note above, self-certifying does not mean you are guaranteed not to be penalized.  The IRS can still audit you, and might decline the waiver of the 60 day rule.  So keep excellent records of all your communications with the brokers about your lost check, replacement, and so on.

Sources:

https://www.irs.gov/irb/2016-37_IRB

https://www.irs.gov/publications/p590a

[macuser_22]

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@Opus 17 wrote:

@macuser_22 

How can it be a direct rollover if the taxpayer has a physical check in hand?

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The check is made out to the retirement account custodian, not the poster.   Many, if not most, direct code G rollover are done this way.     The 401(K) does not do an electronic transfer to the rollover account, then issue a check made lout to that account.

@dmertz can you comment on this.   You have said the same thing in the past.

You have 60 days to rollover after *you receive the distribution* (per IRS rules), if the check is not made out to you then *you* di not receive it - you are just being the delivery service.   You do not have constructive receipt of money that you cannot access.

[Opus 17]

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@macuser_22 wrote:

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@Opus 17 wrote:

@macuser_22 

How can it be a direct rollover if the taxpayer has a physical check in hand?

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The check is made out to the retirement account custodian, not the poster.   Many, if not most, direct code G rollover are done this way.     The 401(K) does not do an electronic transfer to the rollover account, then issue a check made lout to that account.

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OK.  Even so, the "lost check" route may still be a way for the taxpayer to self-certify a waiver to the 60 day rule. 

[macuser_22]

The renowned expert Ed Slott puts it this way:

https://www.irahelp.com/slottreport/retirement-plan-checks-and-60-day-rollovers

Generally, when you receive a check from your IRA custodian or employer plan, you have 60 days to rollover the funds to another retirement account, either an IRA or an employer plan. As with most retirement plan rules, this rule comes with two exceptions – one good and one bad. Let’s look at what happens when Lori receives a check.

Checks Payable to the New Retirement Account

A check that is payable to Lori must be redeposited in a retirement account by the 60^th day after the receipt of the check. But Lori does not have a check payable to herself. She recently changed jobs and wants to move her 401(k) funds to an IRA. Her employer sent her a check payable to her IRA custodian fbo (for benefit of) her IRA account. Lori cannot cash this check; she cannot use the proceeds from this check; Lori can only forward this check on to her IRA account.

This type of check is considered a transfer or direct rollover of her funds from her employer plan to her IRA. This transaction is not subject to the 60-day rollover rules. If Lori puts the check in a drawer and forgets about it for three months, she can still forward that check to her IRA custodian.

[macuser_22]

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@Opus 17 wrote:

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@macuser_22 wrote:

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@Opus 17 wrote:

@macuser_22 

How can it be a direct rollover if the taxpayer has a physical check in hand?

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The check is made out to the retirement account custodian, not the poster.   Many, if not most, direct code G rollover are done this way.     The 401(K) does not do an electronic transfer to the rollover account, then issue a check made lout to that account.

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OK.  Even so, the "lost check" route may still be a way for the taxpayer to self-certify a waiver to the 60 day rule. 

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The 60 day rule simply does not apply for a direct rollover (which is technically a transfer and not  rollover even though code G calls it a rollover).  No need for a waiver since is is not a 60 day rollover in the first place.

[dmertz]

With a check made out to the new qualified account, it's not uncommon for the 401(k) plan to send the  check to the participant for forwarding to the new account's trustee.  Some plans provide the option to send such a check to either the participant or to the new trustee, but either way it's still a direct rollover.  If it's sent to the participant, the participant just serves as a delivery carrier.

Problems can occur if in indicating the payee the 401(k) plan does not specifically identify the account that is to receive the direct rollover.  It's somewhat improper, but not all that uncommon, for a 401(k) plan to make the check out to the new trustee for the benefit of the participant without specifying at least the type of account that is to receive the rollover.  In that case the new trustee is not obligated to deposit the check into the correct type of account and sometimes irrecoverable errors can occur.

A direct rollover is indeed a rollover as defined in the tax code.  However, the tax code only imposes the 60-day rollover deadline on indirect rollovers.  An indirect rollover is one where the distribution is paid to the participant, not one that is paid directly to the receiving qualified account.

[macuser_22]

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@dmertz wrote:

A direct rollover is indeed a rollover as defined in the tax code.  However, the tax code only imposes the 60-day rollover deadline on indirect rollovers.  An indirect rollover is one where the distribution is paid to the participant, not one that is paid directly to the receiving qualified account.

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@dmertz As an aside (off the subject of this thread) 

What I have wondered is how the IRS enforces the 60-day rule for indirect rollovers since neither the 1099-R or the 5498 form shows the date of distribution or the date of deposit of the rollover contribution - it only shows the years activity?    Do you know?

[dmertz]

The IRS relies on custodians and plan administrators to enforce the 60-day rule, otherwise the IRS only detects a violation upon audit of the transaction.  However, it probably relies more on the the honor system with IRA and plan agreements making the individual the one responsible for complying with the tax code.