jim d asked:
Last year the company I worked for went bankrupt. We were given a check for our 401K and told to invest it in an IRA within 60 days to avoid paying income tax, which I did. When I did my 1040 I noticed the IRS took $488 as income tax. I phoned the IRS but no luck. How can I get my $488 back from the IRS on a bankrupt 401K?
Last year the company I worked for went bankrupt. We were given a check for our 401K and told to invest it in an IRA within 60 days to avoid paying income tax, which I did. When I did my 1040 I noticed the IRS took $488 as income tax. I phoned the IRS but no luck. How can I get my $488 back from the IRS on a bankrupt 401K?
Look at the 1099R that was issued to you for the 401k distribution. Were there taxes withheld from the amount given to you? If so, in order to avoid income tax and penalty, you would have had to invest the amount given to you and any tax withheld.
If tax was withheld, you were assessed income tax on that amount plus a 10% penalty.
If you did not include the withholding on your tax return, amend your return and you might reduce the tax owed.
If you did not properly record the reinvestment, and are being taxed on the full distribution, you also need to amend your tax return.
You might want to take your tax documents for the 401k, IRA, your 2007 tax return, and the correspondence from the IRS to a tax preparer for review.
So, on your 1040, how did you show the rollover on the IRA line?
When your company wrote you the check, they withheld 20% ($488) for taxes and gave you a check for the rest $1952.
You had 60 days to roll the ENTIRE amount over, making up the $488 out of your pocket. (In which case you would have gotten the full $488 refunded at tax time). If you only rolled over $1952, you paid income tax on the $488 *and* $49 in penalty.
If you totally blanked and didn’t put anything on your tax return, you need to amend it….
It has nothing to do with the company’s bankrupcy.
As long as you did roll it over into an IRA within the required 60 days, when you filed your tax return you should have showed the amount as pension but not included it in the taxable amount, and indicated it was a rollover – tax software has a place to enter that, and if you didn’t use software but just did your return manually, you should write rollover after the amount. You’d include the withholding along with any other withholding you had for the year, and it would get refunded that way.
If you didn’t do this, and you already filed, then you need to file an amended return.