401(k) Withdrawal Issue

Cancel the distribution request. Roll the distribution into an IRA within 60 days. Either action will avoid having the distribution taxed in 2021. Be aware that if any tax is withheld from the distribution and OP chooses to roll over the distribution, he needs to include the amount of withheld tax (from some other source) to make this a total wash.

Ira Smilovitz, EA Leonia, NJ

Thanks.

He should be able to do an indirect rollover into an IRA, if he puts the money into the IRA within 60 days of getting the distribution.

The employer may withhold 20% for taxes, but the rollover has to be of the full amount, not just the 80% he got. The withheld amount would be a credit on his 2021 tax return.

Thanks. What he'd really like to be able to do is be taxed on the money in 2020, when he requested the distribution and, under ordinary circumstances, would have received it. But apparently that's not an option.

I'm assuming that he's 55+ and that's why the withdrawal had no penalty. If he's sub 59-1/2 he'd create a penalty situation for an IRA withdrawal.

On a personal note - My wife was 56-1/2 when we retired (I was 50). So for the first 3 years we had 401(k) withdrawals and got huge tax refunds each year. Between charity, medical, mortgage, we have large Sch A deductions. Once she hit 59-1/2, the money is funneled through her IRA so withholdings are the exact percent we request. No big refund or payment at tax time.

It seems it will be too late for OP to make the change. If they'll change where they send it, and stop the 20% withholding, they should accept a request to cancel the entire transaction, no?

I'm not aware of any way to backdate a distribution and claim it was due to a mistake. The opportunities for abuse, not in this case but in general, would be overwhelming.