Indirect roll over do I p

[icaneatmyhair]

I recently requested a withdrawal from a 401k with an old employer, forgetting to consider early withdrawal penalties. Some of the funds were pre-tax (employer contributions) and some were post-tax/Roth (my contributions). I received a check with some federal income tax withheld (at 23.58%) and some as Roth 401k federal income tax withheld (20%). 

I am still in the 60-day period, and I'd like to put the money back into a Roth IRA; the question is, how much do I put in to avoid the 10% penalty and minimize taxes paid?

[Carl]

You put it "ALL' in. That means that *you* have to make up the difference for the taxes and any penalties withheld out of your pocket. You'll get those withheld monies refunded to you at tax filing time *IF* you complete the rollover within 60 days of the withdrawal date.

[dmertz · Accepted solution]

I assume that your question is intended to indicate that the post tax contributions are all Roth 401(k) contributions and that you were under age 59½ at the time of the distributions.

To avoid the 10% early distribution penalty on the portion distributed from the traditional 401(k) account you must roll this entire portion over to a traditional IRA to continue to defer this income or to a Roth IRA as a taxable rollover.  Any amount of this portion not rolled over will be subject to ordinary income tax and the 10% early-distribution penalty.

As for the portion distributed from the Roth 401(k), you must roll over to a Roth IRA at least the amount in excess of your original contributions to the Roth 401(k).  In other words, at least the earnings distributed from the Roth IRA must be rolled over, otherwise the earnings not rolled over will be subject to ordinary income tax and the 10% early-distribution penalty.  Since you've already paid the taxes on your original contributions, that amount not rolled over is tax and penalty free, but you will have squandered the opportunity to keep this money in a Roth account to grow with the growth eventually being tax and penalty free.

Any amount withheld for taxes is part of the amount distributed.  To roll over the entire distribution will require that you substitute funds from another source to complete the rollover of the entire amount within the 60 day deadline.  You'll eventually get a refund of any excess tax withholding after filing your 2017 tax return.

It's unclear why the payer would have withheld 23.58% for federal income taxes from the traditional 401(k) distribution and 20% for federal income taxes from the Roth 401(k) distribution unless you explicitly requested that more than the mandatory minimum distribution be withheld.  The mandatory federal withholding is only 20% of the taxable portion of either distribution.  Presumably the entire traditional 401(k) distribution would be taxable if not rolled over, so one would expect that only 20% of the gross traditional 401(k) distribution would have been withheld for federal taxes.  (Perhaps 3.58% of this was mandatory state tax withholding; some states have mandatory withholding.)  As for the Roth 401(k) distribution, presumably a large portion of this consisted of original contributions, so the mandatory federal withholding should have been less than 20% of the gross Roth 401(k) distribution.  You'll want to be sure that you know the correct gross amounts of the distributions and the amount of your original contributions to the Roth 401(k) to ensure that you roll over the amounts necessary.

[icaneatmyhair]

Great answer, that's what I was thinking was going to be the case. Thank you for the response!

[icaneatmyhair]

Another question, do I just need to ensure I deposit AT LEAST what was in my 401k? So could I  theoretically deposit more than what was in my 401k if I wanted to play it safe?

[dmertz]

Anything you deposit to the traditional IRA in excess of the gross amount distributed from your traditional 401(k) would be a new, regular contribution to your traditional IRA subject to the annual contribution limits for regular contributions.  Anything that you deposit to the Roth IRA in excess of the amount distributed from the Roth 401(k) would either be a taxable Roth rollover from the traditional 401(k) (and only the remainder of the gross distribution from the traditional 401(k) would be available to roll over tax-free to the traditional IRA) or a new, regular contribution to the Roth IRA subject to the annual contribution limits for regular contributions.

The IRA custodian will require that you identify which contributions are rollover contributions of amounts distributed from the 401(k) and which contributions are new, regular contributions.  If you mistakenly roll over more than permitted or make new, regular contributions that are more than permitted you will be subject to a 6% penalty on the excess contributions each year they remain in the account.