Rollover Withholding
“Eligible rollover distributions” are subject to a 20% withholding requirement. Learn how this could impact your tax liability below.
The rollover withholding requirement can be avoided only if a taxpayer arranges for the distribution to be transferred directly to another retirement plan or IRA.
Example - Withholding on “Eligible Rollover Distributions” - Gray, age 62, retired from ABC Enterprises. His retirement plan at ABC contained $102,000 (pre-tax dollars), which was eligible for rollover. Gray requested that the distribution of the entire amount in the plan be made to him personally; he then intended to roll over the proceeds to an IRA. Because Gray received the retirement plan payout directly, the plan administrator was required to withhold $20,400 ($102,000 x 20%). The net distribution to Gray is $81,600 ($102,000 - $20,400).Gray rolled $81,600 to an IRA within the allotted 60-day period. Six months later, he contacted his tax preparer for tax planning. When he explained the details of the distribution, his tax preparer realized that Gray would owe additional tax on $20,400 ($102,000 - $81,600), because he failed to roll over the entire $102,000. It was too late for Gray to fully fund the rollover IRA by adding $20,400 of other money because the 60-day rollover period had expired.
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