I took an indirect rollover from an IRA to roll into a 401k.

Let's say for $4000.

At the end of the 60 day payback period, I only had $3000 available to put into the 401k, which I did. I was $1000 short.

During the 60 days though, I contributed over $1000 to the 401k. Let's say I contributed $2000 via payroll deduction.

Is there any way to use $1000 of the $2000 payroll deduction to offset the $1000 shortfall on the repayment?

Thanks for any help.

#1: With an indirect rollover you receive the money directly in the form of a check. You are then to deposit that cash distribution into a new retirement account within 60 days otherwise you will face penalties. Your employer however is required to withhold 20% of your funds as prepayment for your federal income taxes. You have full use of the funds for that 60 days but if you do not redeposit it into a new 401K acct., the entire amount will be taxed and may incur penalties. To avoid any taxes or penalties, you need to deposit the full amount, including the 20% into a new 401K account.


#2:It depends as long as the over contribution of $1K fully covers all the rollover costs (Or the withholding tax rates, 20%, or 10% of prepayment penalty is higher than your marginal tax rate); for example, a 401k indirect rollover does not automatically preserve the tax benefits associated with your 401k account. Because you’re being given the distribution amount , $4K, directly instead of the transfer being handled by account trustees, the IRS places additional strictures on indirect rollover to try to ensure you re-invest your retirement savings in another qualified 401k plan.The first penalty is an automatic 20% withholding of the account balance that’s designed to pay a portion of the taxes that would be due should you elect not to re-invest the funds in a new 401k account. Although the taxes due if you decide to keep the funds would likely be more than 20%, this insures the IRS that they’ll get at least a portion of the taxes that become due on the distribution.The second penalty is a 10% early withdrawal fee. Because it can’t be guaranteed that you’ll actually execute the 401k indirect rollover, the IRS also preemptively assesses this penalty based on the assumption that you won’t.To have these withholding fees credit to your new 401k account, you must open a qualified 401k account within sixty days of receiving the distribution check and make a deposit in the amount of the entire original distribution (including the amounts that were deducted in fees and withholding). To recoup the withholding, you must then file the amounts as a credit on the distribution year’s tax return.As a quick example, let’s assume that you have $30K in a IRA account and you decide on an indirect rollover:Account value: $30K; Tax withholding: 20% of $30K or $6K; Early withdrawal fee: 10% or $30K or $3K
Total distribution: $30K– $6K– $3Kor $21K. To recoup the $9K in fees and penalties, within sixty days you must deposit into a qualifying 401k account the amount of $3K,NOT $21K. You’ll eventually be credited the $9K when you file your tax return but, in the short term, you must come up with that $9K on your own.As you can see, the 401k indirect rollover isn’t the preferred method the IRS wants you to use to rollover your 401k account. It’s designed to place substantial penalties on your retirement funds to help ensure that you’ll actually follow through on rolling over the money into another qualified IRA or 401k account.

The $4,000 I refer to in my original post was actually in an IRA account established because a former employer's 401k had closed.

The investment company handling the indirect rollover asked if I wanted taxes withheld: I said no, they cut a check for $4,000.

I understand that as of 4/15/2014, I'll be on the hook for income taxes + the 10% penalty if not repaid within 60 days. But I received a check for $4,000, and it's $4,000 that I need to put into my current 401k to avoid income or penalty taxes.

So, I made this one time payment of $3,000 within the 60 days. @Wnhough, are you saying if I don't pay back the entire $4,000 in the 60 day period, that $3,000 repayment doesn't matter?

My other questions was: are payroll deductions during the 60 day payback period eligible to cover (partially or completely) the $4,000?

In my case, combined with a one time payment of $3,000, my four $1000 payments would totally cover it (and then some.) My worry is that those four $1000 payments can't count towards the repayment because they were payroll deductions.

I'm worried payroll deductions are somehow ineligible to cover the indirect rollover shortfall.

I'll call the investment company on Monday and see what they say.

Would appreciate any more insight, but thanks for your insight!

“The $4,000 I refer to in my original post was actually in an IRA account established because a former employer's 401k had closed.”==>>>That’s what I understood.

“The investment company handling the indirect rollover asked if I wanted taxes withheld: I said no, they cut a check for $4,000”==>>>The exception to mandatory w/h is a distribution from an IRA; such distributions are not subject to the 20% w/h tax.So as long as you want to roll your funds, $4K, into a new 401K and avoid taxes, you must contribute the whole $4K.However, as said, in general, when you perform an indirect rollover, the existing IRA custodian administrator is required by the IRS to withhold at least 20 percent of the IRA balance. This means that the IRS is assuming you are going to spend the money and forces the custodian to pay a minimum amount of taxes. If you complete the rollover within 60 days, you will receive the 20 percent withholding back when you file UNLESS your marginal tax rate is higher than 20%. To complete the rollover and prevent a penalty, you must roll 100 % of the IRA over, meaning the 20 percent withheld must be fulfilled with other personal assets within the 60 days. Otherwise the 20 percent is a distribution fully taxed and penalized.

I understand that as of 4/15/2014, I'll be on the hook for income taxes + the 10% penalty if not repaid within 60 days. But I received a check for $4,000, and it's $4,000 that I need to put into my current 401k to avoid income or penalty taxes.”===>>>>Correct. As said the whole of $4K needs to be rolled over to a new 401K.

So, I made this one time payment of $3,000 within the 60 days. @Wnhough, are you saying if I don't pay back the entire $4,000 in the 60 day period, that $3,000 repayment doesn't matter?”===>>>>>>Correct; as you can see, you need to roll over the whole $4K. as described previously; please reread above. If you fail to perform the rollover within 60 days, then the full amount, 4K, is treated as a distribution subject to ordinary income tax and a penalty of 10% on the amount distributed if it qualifies as an early withdrawal.

“My other questions was: are payroll deductions during the 60 day payback period eligible to cover (partially or completely) the $4,000? “==>>>>I do not think so UNLESS it is rolled over to a new 401K plan.I guess you need to contact an retirement plan administrator for more info in detail.

In my case, combined with a one time payment of $3,000, my four $1000 payments would totally cover it (and then some.) My worry is that those four $1000 payments can't count towards the repayment because they were payroll deductions. “=====>> I understand what you mean as I said UNLESS it is / can be rolled over to a new 401K plan, No I don’t think so.