This one stumped my accountant...

My husband had a 401K distribution when his company folded, it was a rollover check made out to his next company's 401K, FBO him.

That company folded before the check was deposited, and the 401K was closed. The 401K plan administrator has been disbanded as well, and we can't find any trace of them.

The check sat in a drawer for a few years (and is expired), then we got word that the funds were being held in the state's unclaimed property.

We've got the form to get the money from the state, but they want to send us a check made out to my husband only. They said they don't know anything about issuing the funds to his current 401K fbo him, which would be the best answer for us.

We want to get this money into his current 401K (or something) without any tax penalty.

What do we do? Do we take the check from the state and if so, what is reported to IRS, etc and how do we get it into the current 401K (or something)?

If not, what is recommended here to avoid losing half the money to the IRS?

If anyone can answer, they get the super duper amazing prize of the day, because I haven't been able to find ANYONE who can help, and thus the state still is holding the money.

THANKS SO MUCH!!
annabanana :confused:

Annabanana:

Well, at least you have the money, so you are way ahead than where you were a few short months ago.

At the very minimum, you can have the state issue the check to your husband and he can roll the money into a rollover IRA at a bank, mutual fund or brokerage house of your choice. You can then make arrangements to roll that money from the rollover IRA into your husband's current 401K, if that's what you really want to do. However, In my opinion, it would be better if you retained the money in the rollover IRA, as I am sure the bank/brokerage house/mutual fund would have a lot more investments options than your average 401K plan.

If the state withholds the mandatory withholding for a early distribution (I believe it's 20%), you would have to make up that 20% out of pocket when you rolled the money back into the rollover IRA, then get it back when you file your 2005 tax return. If you failed to make it up out of pocket, you would then pay taxes on that 20% at your current marginal tax rate plus pay a 10% early withdrawal penalty on that 20% withhheld amount. The amount of the 401K distribution would dictate whether making up the 20% withholding out of pocket is a viable option. I could see how that might be a problem if the 401K is $100,000 and you would have to have to come up with $20,000 out of pocket. Not a lot of people can do that.

Talk to the state official administering the unclaimed property account. You may be able to convince him/her to issue you the entire 401K balance without the 20% withholding, considering it sat in their account earning zero interest for several years.

The state agency will (hopefully) generate a Form 1099-R for the IRS and your state tax authority, so you will have to account for that money on your 2005 tax return. They may generate a Form 1099-MISC (which would cause a problem, but not a huge one). In any event, make a photocopy of the check the state sends you and retain the rollover IRA statement that shows you properly deposited the money into the rollover IRA. Be sure to tell the bank, mutual fund or brokerage house of your choice that it is a rollover transaction.

You may have to file Form 5329 with your 2005 return to explain what you did with the money.

BOTTOM LINE: As long as you properly roll over at least 80% of the money into a traditional rollover IRA, you should not have any real significant problems with the taxes. Of course, try to roll over the entire amount. That's the simplest way to deal with the problem.

BTW, if this problem stumped your accountant, you may want to consider getting a new accountant (or at least a new tax professional to do your taxes).

And the state unclaimed property folks are just going to cut us a check for the entire amount. They don't seem to pay attention to what type of funds are being reclaimed, it's all just money to them. I think we have to pay some sort of penalty or fee to them which they'll take out. Not sure what sort of IRS paper they send, but I can find out I think.

So, it is good news that we can roll the entire amount. I was hoping that was the case, and not that we would have to hold back some then put it back or pay some taxes that we'd then get back or something like that.

I also like an IRA better than putting all our eggs in one 401K. At the rate my husband's companies fold, it can be a real pain to move that stuff around! Obviously, since we 'lost' that money for several years.

And I also agree with you on the new tax professional/accountant. This year we used software instead of their firm. Next year we'll look for someone not so scared by the tricky stuff. And we'll keep a good paper trail.

Any other opinions are welcome, but I can tell from reading the boards that your advice is gold - thanks so much! I now feel comfortable proceeding with having them send us the money directly.

Annabanana

Annabanana:

If you are looking for a new tax professional, I am available.

I have a number of clients whom I serve via e-mail, phone calls, fax and good-old-fashioned US mail. In fact, I currently have four clients whom I have never met in person!

You will find my service economical and professional (even if I do say so myself), and my rates are very competitive. I also have references among my current clientele, to include one of the clients I have never met (she will send you an e-mail).

It makes no difference which state you are in, since I have software for every state that has an income tax.

You can contact me at [email protected] if you are interested!

Thanks - and what a wonderful service you are giving here on this board for FREE - I hope you get lots and lots of clients from it.

My current accountant isn't in the state I live in anyway, she's where we used to live. She likes to do everything at the very last minute and I am always sweating the FEDEX guy getting here in time for me to get to the post office to get things postmarked. If you operate on a less tight schedule, that would be great.

We don't always use a pro to do our taxes cause we're usually pretty simple but it depends on the year and what happens. If we get this money this year, that will mean we'll need some help.

Do you do corporate (C-corp) accounting/taxes, too? I do the bookkeeping so things are pretty clean, and the corp. isn't active right now, but I've got the same accountant and same issues there - I like to have things wrapped up ahead of time so as not to have to think about deadlines, etc.

Anyway, I can tell it's time to take this offlist I'll be in touch about all that later!

Thanks,
Annabanana

p.s. we live in a no income tax state so that makes us even easier.

Annabanana:

Thanks.

As for the corporation, I can do the tax return, but not the accounting as I am not an accountant but rather a tax professional.

You have the e-mail address. Contact me when you are ready!