Transfer from 401k to Checking Account to Roth IRA

[bwilson818]

We got a check from my wife's 401k and we deposited it into our checking account, but then immediately transferred it over to a Roth IRA with a different bank. Is this money going to suffer the penalty for early withdrawal because we deposited into our checking account initially? We did not know how to get it from the check from the 401k to an IRA without first putting it into our account and then transferring it from there.

[bwilson818]

So let's say the amount that the 401k says we withdrew on the 1099-R statement is $236 but the check they sent us was for $186. (Amount after taxes were taken out). Your saying because I deposited it into a checking account, BEFORE I transferred it into the Roth IRA, that I have to supplement the taxes that were taken out from my own income? Will I get a refund for that supplement? How do I report this in turbo tax?

[DDollar · Accepted solution]

There is no penalty as long as you deposited the total amount of your 401(k) distribution (including any taxes withheld) into your Roth IRA in no more than 60 days. Failing to complete the rollover within that time period renders the distribution ineligible for a rollover. If you had money withheld from the distribution for income taxes, you must supplement the amount you received to make sure the entire amount requested gets rolled over.

You must include the amount of your 401k plan rollover to your Roth IRA as part of your taxable income because you are moving the money from a pretax account, the 401k plan, to an after-tax account, the Roth IRA. You must complete Form 8606 to determine the taxable portion, which will be the entire amount unless you made nondeductible contributions to your 401k plan. Report the total amount of the rollover as a nontaxable pension and annuity distribution and the taxable portion as a taxable pension and annuity distribution.

Money that you roll into a Roth IRA from a 401k plan must remain in the Roth IRA for at least five years before you qualify to take penalty-free distributions, even if you turn 59 1/2 before that. This time requirement applies separately to each rollover.

[bwilson818]

So let's say the amount that the 401k says we withdrew on the 1099-R statement is $236 but the check they sent us was for $186. (Amount after taxes were taken out). Your saying because I deposited it into a checking account, BEFORE I transferred it into the Roth IRA, that I have to supplement the taxes that were taken out from my own income? Will I get a refund for that supplement?
How do I report this in turbo tax?

[dmertz]

Yes.  Regardless of why taxes were withheld, if you did not substitute other funds to complete the rollover of the entire distribution to the new account within 60 days, the amount withheld for taxes remains a taxable distribution.

Any amount withheld for taxes is applied on your tax return as a credit toward your overall tax liability.  Any amount of your overall withholding and other tax payments that is in excess of your overall tax liability will be refunded.  (That's what a tax refund is.)

[DDollar]

Because the funds were distributed to you instead of being a direct rollover, the 401(k) plan was required by law to withhold 20% of the distribution for federal taxes.  In order to avoid a penalty, you would have had to contribute $236 to the IRA.  If you only contributed $186, there will be a penalty on the part of the distribution that was withheld for tax.  In your scenario, $50 was withheld, so there will be a $5.00 penalty.  The entire $236 is subject ordinary income tax.