Bank failed to withhold 20% on indirect IRA rollover

My wife's memory is that the bank representative she talked to didn't realize it was an IRA CD. My wife didn't know about the 20% withholding on an indirect transfer and neither did I. I have some memory of doing an indirect transfer a long time ago without having to deal with the withholding and having to make up the difference.

If she pays the 10% and now has the money in a Vanguard IRA, is the amount taxed again when she withdraws it?

Finally, is the rollover in this case not treated as a rollover so that the Vanguard IRA is treated as a new IRA an subject to limits (so that she may also be penalized for excess contributions to an IRA?

Thanks for any assistance!

============If the rollover completed within 60 days, there's no amount on which to impose the excise tax, and there's no income tax. It doesn't matter what the 1099-R says if you can prove the rollover.

This is a perfect example of why one does not ask bankers for tax advice.

You seem to be confused on several fronts. A rollover can be done either as a direct custodian/custodian transfer or by taking a distribution from the old IRA and depositing it in the new one within 60 days. In neither case is there any tax due. See the instructions for line 15 of the 1040 for how to report the rollover.

Withholding is not required from any IRA distribution. You're probably thinking about the 20% withholding required from employer plans, e.g., 401(k)'s, unless they do a direct transfer to another qualified plan, e.g., an IRA.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Yeah, I ask my car mechanic for tax advice. I only ask my banker for cooking advice.

direct custodian/custodian transfer or by taking a distribution from the old IRA and depositing it in the new one within 60 days. In neither case is there any tax due. See the instructions for line 15 of the 1040 for how to report the rollover.

thinking about the 20% withholding required from employer plans, e.g., 401(k)'s, unless they do a direct transfer to another qualified plan, e.g., an IRA.

Thanks, every Retirement plans: A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement account. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding.

Nowhere do they clarify that "retirement plan" = "employer plan", as Phil notes. I thought of my wife's IRA CD as part of her "retirement plan". A number of other "helpful" articles on the web mention the same 20% withholding requirement without clarification. I suppose the most common rollover is from a employer plan to a private one, so that's what people cover.

Using the advice to not trust bankers, I found that if I searched for "IRA Rollover CPA", that the articles I found did a better job of differentiating between rollovers from employer plants to IRAs and IRAs to IRAs. I'll have to remember that trick the next I go looking for tax advice.

Again, thanks to all for clearing this up.

direct custodian/custodian transfer or by taking a distribution from the old IRA and depositing it in the new one within 60 days. In neither case is there any tax due. See the instructions for line 15 of the 1040 for how to report the rollover.

thinking about the 20% withholding required from employer plans, e.g., 401(k)'s, unless they do a direct transfer to another qualified plan, e.g., an IRA.

A non-periodic payment from an IRA to the owner requires 10% withholding. IRC Sec. 3405 or see Pub 15A page 23. _____ Alan

"Requires" seems awfully definite in light of the provision in 3405 that allows the payee to opt out of withholding from both periodic (3405(a)(2)) and nonperiodic (3405(b)(2)) payments. This as opposed to payments from a 401(k), which have no opt out feature.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

From the Pub15a section you refereed to:

Nonperiodic Payments?10% Withholding You must withhold at a flat 10% rate from nonperiodic payments (but see Eligible Rollover Distribution?20% Withholding next) unless the recipient chooses not to have income tax withheld (if permitted). Distributions from an IRA that are payable on demand are treated as non- periodic payments. A recipient can choose not to have in- come tax withheld from a nonperiodic payment by submit- ting Form W-4P (containing his or her correct TIN) and checking the box on line 1.

The recipient can choose to not have taxes withheld. The 20% for 401(k) withdrawals is not optional.

(I believe my snips were accurate, Phil writing not required for IRAs, Alan citing Pub15a, etc)