401K early withdrawal and creation of IRA

[sharee-thornberr]

I am doing my son's taxes. He was going to have to pay so we created an IRA. Then I found out he received a 1099-R for a 401k he cashed out as required from a prior employer. His new total income now doesn't allow the deduction of the newly created IRA. Now he is going to have to pay a lot more in taxes. He is 43. How can we fix this so he won't have to pay so much?

[RaifH · Accepted solution]

At this point, there is not a lot you can do to reduce his 2021 taxes given that we are already in 2022, especially if his income is too high to get a deduction for his contribution to an IRA. 

When he cashed out the 401(k) from his former employer, did he roll it over into an IRA or did he take the cash? Any amount he put into an IRA within 60 days of the cash out is considered an indirect rollover, so if you created the IRA within 60 days of the 401(k) distribution, you could code part of it as an indirect rollover which is not taxable income and not subject to early withdrawal penalties. 

If he has a high deductible health plan, it is not too late to make a 2021 tax-deductible contribution to a health savings account, as long as he does not exceed the maximum contribution amount for the year, which is $3,600 if he has a self-only plan or $7,200 if he had a family plan for the entire year.