Indirect Rollover

[dhous3]

Hello -  Trying to help my daughter...  She left a job and didn't have enough money in a company sponsored 401k (~$800), this caused her incur an indirect rollover.  She was issued a check and then subsequently opened a Vanguard account.  However, apparently it was not enough to actually open the IRA and they called it an IRA account but the funds are apparently in an ETF under the "IRA account name".

Trying to figure out where and how she should report this as she actually paid the tax and the penalty.

When this all took place back in June she spent numerous hours on the phone with both T Rowe Price and Vanguard and her take away was she would get that money back at tax time.

Hopefully this makes sense.  Any help would be appreciated.

Thank you!

[dmertz]

If there was a substantial conversations between the 401(k) trustee and the IRA custodian, it seem odd that this was not done as a direct rollover.  If this was indeed an indirect rollover (which seems to be the case since it sounds like federal income taxes were withheld), a minimum of 20% was required to have been withheld for federal income taxes.  To roll over the entire distribution, other money would have had to have been substituted for the amount withheld to be able to roll over the enter amount of the gross distribution.  If less than the full gross amount was rolled over, the amount of the gross that was not rolled over remains distributed and subject to income tax and to a possible 10% early-distribution penalty.

The fact that the money is now in an EFT within the IRA indicates that a rollover of at least some portion of the distribution from the 401(k)  was completed.  It just sounds like the investment made within the IRA was to an ETF because, apparently, the amount rolled over to the IRA was simply not sufficient to be invested in some other investment that was being considered because of the minimum investment requirements for that other investment choice.

For a code 1, 2 or 7 Form 1099-R, when entering the Form 1099-R into TurboTax, indicate that the money was moved to another retirement account, that the money was rolled over, then indicate the amount that actually made it to the IRA.  TurboTax will include on Form 1040 line 5a the entire gross amount from box 1 of the Form 1099-R and will include on line 5b the taxable amount that was not rolled over to the IRA, if any.  For a code 1 Form 1099-R (because she had not reached age 55 in 2020), TurboTax will also include on Schedule 2 line 6 the 10% early-distribution penalty on the taxable portion.

Whatever amount withheld for taxes from all sources that exceeds her overall tax liability becomes her tax refund.  If her overall tax withholding was less than her overall tax liability, she'll have a balance due.

[dhous3]

First, thank you for the reply!

It was indeed indirect, the check was sent to her and then she had to jump to through hoops to get it into Vanguard.

The other unknown/issue is she has yet to receive the 1099-R, that would help to clarify things a bit more for sure.

Thanks again!

[Opus 17]

An IRA can hold any kind of investment, from individual stocks to mutual funds to ETFs.  It sounds like you first need to determine whether the money is in a brokerage account or an IRA.

If the money is in a IRA, then you have an indirect rollover. However, if you only deposited $640, the amount after tax, then you have a $640 rollover and a $120 withdrawal, which will be subject to income tax plus a 10% penalty. If the money went into a brokerage account, then the entire $800 withdrawal is taxable and subject to a 10% penalty because it is not a rollover. However, in the future, if you sell or cash out the brokerage account, you will only pay income tax on the gains instead of the entire amount.