Dan Moisand

Fri, Jun 13, 2025, 11:47 AM3 min read

I rolled over my 401(k) last year and my company automatically withheld $15,000 for taxes. I got the remainder (about $60,000) into my IRA way ahead of the 60-day deadline, but my accountant insists that I owe a $1,500 penalty because of the withholding. That doesn’t seem right or fair. What can I do about this?

—Ticked off in Tempe

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This happens often in part because the terminology is confusing. Unfortunately, unless an exception applies, I don’t think you can do anything about it if you were under age 59½ at the time the money came out of the 401(k). If you were over age 59½ the penalty should not apply but there is still a tax consequence. Nonetheless, you can prevent this from happening again with future rollovers.

If a distribution is deposited into another plan or IRA within 60 days of receipt, there is no tax. The default for 401(k)s and some other retirement plans is to withhold 20% for taxes from distributions out of the plan. This is called “mandatory withholding,” but it is not truly mandatory as I’ll discuss in a bit. (Note this 20% withholding regime does not apply to distributions out of IRAs.)

Read: I transferred company stock out of an old 401(k). Now I’m worried I’m facing a nasty tax surprise.

What I suspect happened here is that the plan distributed $75,000 but only $60,000 got to the IRA because $15,000 went to Uncle Sam via withholding. The $15,000 withheld was therefore distributed, but not rolled over. Any portion of the distributed amount that are not redeposited in time becomes taxable income and the 10% penalty will apply if you are under 59½. Look closely at your return and you should see $15,000 of taxable income included on Line 5b. Not only are you subject to the penalty, you paid income tax on that $15,000, too.

The taxes and penalty could have been avoided if you had deposited $15,000 from other funds in the IRA within the 60-day window.

The easiest way to avoid this in the future is to do rollovers as “direct” rollovers, also called “direct transfers” or “trustee to trustee transfers.” Direct rollovers enable a transfer with no tax withholding, so all the funds end up in the receiving account. Rolling over funds this way eliminates the issues with both the 60-day clock and the once per 12-month rules that apply to indirect IRA to IRA rollovers.