Jump to content

Recommended Posts

We have a client that needs to take an in-service distribution from his profit sharing plan, which does allow for in-service distributions.

Since the client is under 59 ½, obviously the pre-mature distriibtion 10% applies; as well the 20% withholding?

 

The client was told by her accountant that as long as the funds were repaid within 60 days, this would not be a taxable event.

I do not think he is correct.

 

Link to comment
Share on other sites

Well, there are two issues - taxation and withholding. Since an in-service distribution (as opposed to a hardship withdrawal) is generally an "eligible rollover distribution" then 20% withholding applies. However, if it is rolled over in a valid rollover within the normal 60 day timeframe, then it isn't ultimately a taxable distribution. 

The plan might not accept rollovers - some don't.

Link to comment
Share on other sites

If the EE expects repayment, would a loan be more appropriate?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

Link to comment
Share on other sites

Valid rollover meaning back into the plan?

The participant says she needs $50K to pay for some expenses, can not take another plan loan for 12 months from October 2017, says she will repay within 60 days into an IRA.

This does not make any sense to me, anyway.  Plan allows for rollovers, why not just repay to the plan?

Why not put the money back into the plan within the 60 days?  10% would still apply as the participant is under 59 ½, but she must return the money to the plan within the 60 days for the distribution to not be taxable?

Link to comment
Share on other sites

Valid rollover meaning a valid rollover to any allowable arrangement - IRA, another or same qualified plan, etc.

Some plans allow direct rollovers, but do not accept "60 day" rollovers. I have no opinion as to whether "better" to roll back into the distributing plan (if allowed) or to an IRA.

10% premature distribution penalty does not apply if the rollover of the full amount is accomplished within the 60 day period, as there is then no taxable distribution.

Link to comment
Share on other sites

 

47 minutes ago, BG5150 said:

Don't forget, she will have to repay the $10,000 withholding, not just the $40,000 check amount.

Or she can repay the $40,000 and take the $10,000 as a taxable distribution. It doesn't have to be all or nothing.

Link to comment
Share on other sites

True.  But I was basing my comment on this:

 

The client was told by her accountant that as long as the funds were repaid within 60 days, this would not be a taxable event.

I was assuming she didn't want to pay taxes at all.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

Link to comment
Share on other sites

Words have meaning, and can be useful for correct understanding.  It may be prudent to avoid "pay back", or "repay", because those terms are not indicative of a rollover. On the other hand, if the plan makes a loan, don't use the word "rollover" at the time of repayment.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...