I did an indirect rollover from a 401k to an IRA. However, Turbotax is saying that I am being hit with a penalty for early withdrawal. How do I change this?

[rebecca-stern]

I spoke to Vanguard (where I have my IRA), and they said that in May they will report to the IRS that it was a rollover, and therefore it is not considered an early withdrawal. However, TurboTax automatically is including the penalty. How do I change this? Thank you!

[SweetieJean]

Did you receive a 1099-R?

[rebecca-stern]

No...but the information has already been entered into TurboTax. I guess I should call the retirement plan that had my 401K to ask them about it?

[rebecca-stern]

OK- I found it. But I still don't understand why I am getting a penalty, if it was an indirect rollover to an IRA?

[Critter]

Ok ... after you enter the 1099-R you must continue thru all the following screens in that section and indicate it was a rollover ... once you do that the penalty will go away. 

[SteamTrain]

With the exception...that if the 401k distribution withheld taxes, and you didn't makeup those withheld taxes when you rolled into the IRA, then that amount will be taxed and be subject to the 10% penalty.

Example:  You took 10,000 form the 401k, and 2,000 (20%) was withheld for taxes.....so you got $8000 into pocket.  If you only rolled 8,000 into the IRA within 60 days, then the 2,000 you didn't make up will be your remaining taxable distribution which adds to income, and another $200 will be assessed as a penalty for early withdrawal  (10% of 2,000) .  This assumes you are subject to the penalty......but what you've posted so far suggest that you are.

[rebecca-stern]

Thanks, this is my situation! If (in your example) the $2,000 was withheld, why is it counted as income? And I still don't understand why I would have to pay a penalty for early withdrawal when I was rolling it over into another retirement account?

[SteamTrain]

It's just like withholding on a W-2 form.   box 1 of a W-2 is total salary before the withholding is considered (exceptions for pre-tax deductions allowed). And you are taxed on the total in box 1, even though not all went into your pocket.

Same situation for an IRA  withdraw and rollover...the Gross is what you removed from your old retirement  account...you are required to deposit the Gross into the new account.  

On the plus side, you get credit for a chunk of withholding not really needed.
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Why do they do it that way...take withholding on a rollover?....well...tons of people withdraw $$ "intending" to roll it over...then don't...so the IRS requires that the withholding be done if you do an indirect rollover so at lest some of the tax hit is covered if the person doesn't follow thru on their rollover.

Direct-transfers don't have any withholding, because you aren't in the middle, potentially siphoning off some of it.....(not that you would..not intentionally anyway)

[rebecca-stern]

OK, thanks so much for explaining this! I clearly should have done a direct rollover, and didn't learn enough to know about these details. Oh well.