With my previous employer, I had been contributing to a Roth 401k account and also receiving an employer match that went into a traditional 401k. After leaving the company, the money was automatically mailed to me as 2 separate checks, both made payable to me. The Roth contribution was the larger check and minimally taxed (1% withheld), and the employer match was a smaller amount and taxed at 20% withholding. I would like to do an indirect rollover to my Roth/traditional IRAs respectively, within the 60 days of withdrawal. I will make sure to put back the amount withheld from each check. My question is- am I allowed to do a rollover for each one of these checks as they will be done in the same year? I am being told that only one check can be a rollover, and the other will have to be done as a contribution. My concern with doing the latter is facing penalties, including an early withdrawal penalty. I want to avoid any penalties and unnecessary taxes.
1. Can I do both checks as rollovers?
2. If one check has to be invested as a contribution, which of the two is better to do that way?
2a. Will there be a penalty for doing this?
[For some odd reason this question got moved to a different section of this forum. It seems to me it would have been better to leave it where it was in the Retirement section since it clearly relates to retirement savings and reporting of distributions from retirement accounts.]
Rollovers form a 401(k) are not subject to the one-rollover-per-12-months limitation. That limitation only applies to a rollover from an IRA (traditional or Roth) to the same type of IRA (traditional or Roth). A 401(k) is not an IRA. Whoever told you otherwise is misinformed.
Regarding your numbered questions:
2. Not applicable.
To roll over the entire amount of each distribution you'll need to replace the amount withheld for taxes using other funds. Any excess withholding will become part of your 2023 tax refund. You might want to consider reducing tax withholding from other income sources if your 2023 tax refund would otherwise be excessively large.
I am not sure how my question got moved to a different section but thank you for the heads up on that.
Thank you for your response. That is exactly what I was leaning towards but I questioned it after being told to do a contribution.
Do the checks need to be deposited straight into my investment accounts to qualify as a rollover? In order for me to add back the funds withheld before I complete each rollover, I would need to deposit the checks into my checking account then transfer the full amount into each respective investment account.
Since there was mandatory tax withholding, it's apparent that these check have been made payable to you. As such you have constructive receipt of the money, so It doesn't matter what you do with the money as long as you complete the rollovers by the rollovers by the 60-day deadline.
Note that if you roll over less that the full amount of the portion distributed from the designated Roth account in the 401(k), the first amount of that rolled over is considered to be the otherwise taxable portion (the portion on which 20% was withheld for taxes, about 5% of the gross amount distributed from the Roth account.)
Depositing the checks into your checking account and then completing the rollovers from there is probably the most straightforward approach, Even if you deposit these checks directly into the respective IRAs, to make up the amount withheld for taxes you would still have to write at least one additional check, possibly two. It would be simplest for the IRA custodian to deal with only two checks instead of four. It also would tend to reduce the possibility for one of the deposits to be made into the wrong account, something that can be extremely difficult to correct.
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