Previous employer closed retirement acct. Received dist check for Roth 401k. What would be the penalty for keeping the money instead of rolling over to Roth IRA?

[kteviah]

My previous employer closed all of their retirement accounts.  I received a distribution check for my Roth 401k.  I didn't realize that there was a check in the envelope; just assumed it was another monthly statement.  I missed the 60 day window to rollover without penalty.

If I decided to keep the money and not roll it into a Roth IRA, what would my penalty be?  I've had the plan for more than five years, but I'm under 50yrs old.

[TaxGuyBill · Accepted solution]

You will pay regular income taxes and a 10% penalty on the amount OVER what you contributed.

For example, if you contributed $10,000 to your Roth 401k and it is now worth $15,000, you will pay regular income taxes (often 25%, plus State, but it depends on your income) and the 10% penalty on the 'extra' $5000.

As a side note, you say "if I decided to keep the money".  If you missed the 60 day window, it can not be rolled over.  However, because you did not yet cash the check, it *MIGHT* not be considered closed or withdrawn yet (you would need to contact the administrators of the 401k to determine that).

[dmertz]

Receipt of a check made out to you is constructive receipt of the distribution.  The 60-day window starts on the date that the check is received.

[dmertz]

However, if the check is made out to a financial institution for the benefit of a Roth account at that institution (or perhaps simply to a Roth IRA for your benefit), rather than being made out to you personally, it is a direct rollover and the 60-day window does not apply.  You must complete the direct rollover by forwarding the check to that financial institution.  You cannot cash such a check yourself.

[kteviah]

So if the check was cut on April 12th, but I didn't receive it until April 25th, how do I prove that if it was sent regular mail?

Thanks to everyone who's responded, btw.

[TaxGuyBill]

@dmertz   It's constructive receipt, but I've seen several cases where the financial institution does not actually 'close' the account If the check was never cashed.  In other words, they may not treat it as a distribution if the check was NEVER cashed (if the check was cashed late, they probably treat the distribution as on the date of the check).  I've sure it varies by financial institution, but it may be worth it to check if that could be the case.

[dmertz]

With regard to the 60-day rollover requirement, it's the IRS or tax court (and perhaps the receiving financial institution) that would need convincing, should they question it.  From what I have read, the IRS considers the 60-day rollover window for a distribution from a 401(k) plan to begin when the funds come under the control of the employee.  That happens the moment that a check made out by the plan to the employee is received by the employee and is able to be cashed.  The closest reference I can come up with at the moment is PLR 201330047 in which the IRS referred to the 60-day window beginning with the date of *receipt* of a replacement check when an original check was never received.

As for proving the date that the check was actually received, there would only be your word to go on, so that would come from your sworn statement.  The IRS does have some idea of the normal transit time for first-class mail.

[SweetieJean]

What's the postmark date on the envelope it came in?
@dmertz  Would it make a difference if, say, the recipient was on vacation, and had his/her mail held by the post office for delivery upon his/her return?

[dmertz]

I believe that I've read a PLR that ruled that mail held by the PO while the intended recipient was out of the country was not received until the held mail was picked up.  I probably won't be able to find that reference, though.