From
Your Perspective:
Managing your retirement nest egg
Indirect rollovers
There’s a potentially serious problem with an indirect
rollover
that can trip you up if you’re caught unprepared. Your employer is required to withhold 20% of the value of your account to prepay the income tax that will be due if you don’t complete the rollover. But you must deposit 100% of the amount you’re rolling over by day 60. That means you must come up with the missing 20% from other sources, such as a savings account.
If you put the full amount into your
IRA
on time, you’ll eventually get the 20% back — when you file your federal income tax return for the year. But if you deposit less than 100%, the difference is considered a withdrawal. That means you owe tax on income you haven’t had the use of, and that you can never again put the withheld amount into a
tax-deferred
account.
A strategic decision
You can avoid losing the money withheld under the 60-day deadline, if you choose a direct transfer. But you may decide that having cash available to meet a short-term goal overshadows the hassle of arranging the transaction. That’s your choice. But you don’t want to get caught with an unexpected tax bill and a depleted account.
