401k cash withdrawal & 1099r errors

[optimus1a]

State - MA

Hello,

I recently took a cash withdrawal of my 401k and so 20% federal tax and the applicable MA state tax was withheld. The 401k company wired me the funds and in error sent me the gross amount (forgot to take into account that taxes were withdrawn). Now they want me to repay the amount that represented the taxes but those funds have been spent.

My question is: Can they just amend the 1099r to show taxes weren't withheld so I can pay them when I do my tax return? If I don't pay them back and the company write's it off wouldn't it kind of be like I am evading taxes? Esssentially the 1099r will say taxes were withheld but I am not paying them if I don't pay the company back.

Please help!

[Snipes5]

They don't have to "amend" anything, the 1099R hasn't even been prepared yet, since the tax year isn't over.

The company should correct their records to show that no taxes were withheld. That is the easiest way to correct this.

No one is going to charge you with tax evasion either way.

Snipes

[optimus1a]

I'm trying to convince them of that but they say their records aren't easily amended. They told me once they have a 1099r on the system they make daily bulk payments to the irs for all the 1099r amounts of the previous day. The 1099r for me doesn't get mailed until the following year. I think they're trying to get out of the irs seeing them dip the next bulk payment to account for the adjustment.

Any thoughts?

[Snipes5]

Ask to talk to a supervisor, and get them to straighten it out. It is clearly their error, and they surely have a mechanism for correcting it.

Many times I have asked clients to get a corrected 1099R for one reason or another, and it isn't that difficult.

Snipes

[abezon]

Did you intend to cash out the 401k or are you going to roll it into an IRA within 60 days? If you roll it over in time, you could notify the company that the withdrawal now qualifies for an exception to the early withdrawal penalty (meaning they have no obligation to withhold anything). At any rate, unless you signed some sort of agreement to repay funds that should have gone to the IRS directly, you probably don't have to fix their mistake.

Beware -- you will have a big tax bite if you don't roll over the funds, so don't spend all the money!

[Snipes5]

As far as I know, there is no mandatory withholding on 401K distributions, so you should be okay there.

Snipes

[efflandt]

From [url]http://www.irs.gov/[/url]

Distributions from qualified pension or annuity plans (for example, 401(k) pension plans, IRAs, and section 457(b) plans maintained by a governmental employer) or tax-sheltered annuities that are eligible to be rolled over tax free to an IRA or qualified plan are subject to a flat 20% withholding rate. The 20% withholding rate is required and a recipient cannot choose not to have income tax withheld from eligible rollover distributions. However, you should not withhold income tax if the entire distribution is transferred by the plan administrator in a direct rollover to a traditional IRA, qualified pension plan, governmental section 457(b) plan (if allowed by the plan), or tax-sheltered annuity.

However, before that, just to make things confusing it says:

You must withhold at a flat 10% rate from nonperiodic payments (but see Eligible Rollover Distribution—20% Withholding later) unless the recipient chooses not to have income tax withheld. Distributions from an IRA that are payable on demand are treated as nonperiodic payments. A recipient can choose not to have income tax withheld from a nonperiodic payment by submitting Form W-4P (containing their correct TIN) and checking the box on line 1. Generally, this choice not to have income tax withheld will apply to any later payment from the same plan. A recipient cannot use line 2 for nonperiodic payments. But they may use line 3 to specify an additional amount that they want withheld.

If a recipient submits a Form W-4P that does not contain their correct TIN, you cannot honor their request not to have income tax withheld and you must withhold 10% of the payment for federal income tax.

But maybe this optional flat 10% is only if you are eligible to take distributions (over 59.5 yrs old, etc.).

NOTE: If you owe more than $1000 when you file income taxes, you may be subject to a penalty.

[optimus1a]

To be honest, I don't think anything will come of it by the way things have been playing out. From what I can tell the company doesn't want to change the 1099r to show tax wasn't in fact withheld so if I don't pay them back they're treating it like a write-off. Since the IRS is going to expect it was withheld I won't end up owing. Guess it's a bank error in my favor.

[Snipes5]

Despite the above quotes, I stand by my statement that tax withholding is not mandatory. If it were, my clients would not keep coming in with $15,000 withdrawals, and no tax withholding.

This is in contrast to bonuses, where 28% withholding IS required. If the above were in fact required, there wouldn't be an option to have nothing withheld.

Snipes

[ShyCat]

From what I can tell the company doesn't want to change the 1099r to show tax wasn't in fact withheld so if I don't pay them back they're treating it like a write-off. Since the IRS is going to expect it was withheld I won't end up owing. Guess it's a bank error in my favor.

Don't count on it. If the bank "writes off" your debt, you'll probably receive a 1099-C "Cancellation of Debt" reporting that amount as taxable income. You're then worse off than if you'd paid them back because you'll owe taxes on the additional income.

[abezon]

Originally Posted by ShyCat

Don't count on it. If the bank "writes off" your debt, you'll probably receive a 1099-C "Cancellation of Debt" reporting that amount as taxable income. You're then worse off than if you'd paid them back because you'll owe taxes on the additional income.

No, better to show the extra funds as "cancellation of debt" & pay 15-25% tax on them than to have to pay 100% back to the company and get some of it back from the IRS at tax time (maybe).