403(b) rollover to Solo 401(k) - Withholding?

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mcraepat9
Posts: 978
Joined: Thu Jul 16, 2015 11:46 am

403(b) rollover to Solo 401(k) - Withholding?

Post by mcraepat9 » Tue Jan 23, 2018 1:44 pm

Here is the scenario:

X has a traditional 403(b) from an old W-2 job that she departed about 11 months ago. X also has 1099 income from a side job, so she opened a solo 401(k) before 12/31/17 (she applied for an EIN, which was required by Fidelity to open the solo 401k, but she is a sole proprietor).

She faxed to the traditional 403(b) provider a rollover request to roll in her traditional 403(b) funds to her newly opened solo 401(k). It just got deposited today, but it seems like the number is a bit low - I am guessing that someone in the picture (403(b) provider?) is withholding income taxes.

Is withholding required under these circumstances? How does she get the money out of withholding? Did she mess this up? Does anyone have any idea what may have happened here?

Thanks in advance for your guidance.
Amateur investors are not cool-headed logicians.

krow36
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Location: WA

Re: 403(b) rollover to Solo 401(k) - Withholding?

Post by krow36 » Tue Jan 23, 2018 2:09 pm

This thread may be helpful? viewtopic.php?f=1&t=232002&p=3736782#p3736782
You need to find out more details.

Alan S.
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Location: Prescott, AZ

Re: 403(b) rollover to Solo 401(k) - Withholding?

Post by Alan S. » Tue Jan 23, 2018 3:39 pm

This should have been done using a direct rollover, and there is no withholding with a direct rollover.

If no check was sent to x payable to x personally, this was a direct rollover and there should not have been any withholding.
However, if the amount deposited into the solo K is around 20% short, that suggests that an error occurred and mandatory 20% withholding was taken from the plan balance.

If that happened x needs to determine why it happened. Could have been a combination of errors and even if the 403 b plan was 100% at fault, it unlikely x will get any more than an apology. However, x would still have the option to complete the rollover using other funds. X has 60 days from the date of the original distribution to complete the rollover if they wish. Otherwise, the withheld amount is taxable and subject to penalty if under 59.5.

mcraepat9
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Joined: Thu Jul 16, 2015 11:46 am

Re: 403(b) rollover to Solo 401(k) - Withholding?

Post by mcraepat9 » Tue Jan 23, 2018 8:13 pm

This was done as a direct rollover - the participant never received a check. The 403(b) provider sent a check directly to the solo 401(k) provider.
Amateur investors are not cool-headed logicians.

mcraepat9
Posts: 978
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Re: 403(b) rollover to Solo 401(k) - Withholding?

Post by mcraepat9 » Tue Jan 23, 2018 8:16 pm

Alan S. wrote:
Tue Jan 23, 2018 3:39 pm
If that happened x needs to determine why it happened. Could have been a combination of errors and even if the 403 b plan was 100% at fault, it unlikely x will get any more than an apology. However, x would still have the option to complete the rollover using other funds. X has 60 days from the date of the original distribution to complete the rollover if they wish. Otherwise, the withheld amount is taxable and subject to penalty if under 59.5.
Question - assuming it was an error, how would X be able to complete the rollover using other funds? Are you suggesting that X can contribute cash to the solo 401(k) in an amount equal to the withheld amount? If X does that, can X get the withheld $ back from the 403(b) plan?
Amateur investors are not cool-headed logicians.

Alan S.
Posts: 7871
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: 403(b) rollover to Solo 401(k) - Withholding?

Post by Alan S. » Tue Jan 23, 2018 10:56 pm

mcraepat9 wrote:
Tue Jan 23, 2018 8:16 pm
Alan S. wrote:
Tue Jan 23, 2018 3:39 pm
If that happened x needs to determine why it happened. Could have been a combination of errors and even if the 403 b plan was 100% at fault, it unlikely x will get any more than an apology. However, x would still have the option to complete the rollover using other funds. X has 60 days from the date of the original distribution to complete the rollover if they wish. Otherwise, the withheld amount is taxable and subject to penalty if under 59.5.
Question - assuming it was an error, how would X be able to complete the rollover using other funds? Are you suggesting that X can contribute cash to the solo 401(k) in an amount equal to the withheld amount? If X does that, can X get the withheld $ back from the 403(b) plan?
Yes, cash would be rolled into the 401k making sure it was considered an additional rollover contribution to the prior rollover. This will not get the withholding refunded since the IRS has it, but would eliminate tax and penalty on the withheld amount. Knowing that x is now over withheld for 2018, x can reduce other withholding or quarterly estimates and effectively get the withholding credited much earlier than when the 2018 return is filed, over a year from now. In other words, pay in less taxes the rest of the year to offset this over withholding error.

That said, I would not just assume that the shortfall is due to withholding without some evidence. There could be another explanation. A call to the 403b plan administrator should generate confirmation exactly why the amount is less than expected. There is 60 days to complete the rollover, so this is not urgent yet but x should be persistent in getting an explanation of exactly what happened and why before acting and possibly creating a bigger problem.

mcraepat9
Posts: 978
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Re: 403(b) rollover to Solo 401(k) - Withholding?

Post by mcraepat9 » Thu Jan 25, 2018 10:16 am

Thanks all - found out it was the forfeiting of unvested portions of the 403(b) that just coincidentally happened to be 20% of the total. Appreciate the guidance.
Amateur investors are not cool-headed logicians.

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