Yes! You can use AI to fill out Special Tax Notice Regarding Plan Payments

People choose a 60-day rollover, receive a check for 80% of their balance, and only roll over that amount, not realizing the withheld 20% is also considered a taxable distribution. This results in unexpected income taxes and a potential 10% early withdrawal penalty on the 20% portion. To avoid this, either choose a direct rollover where no tax is withheld, or if using a 60-day rollover, be prepared to use personal funds to make up the 20% difference to complete a full rollover.

Individuals receive a distribution check and fail to deposit it into a new IRA or employer plan within the strict 60-day period, often due to procrastination or misplacing paperwork. The consequence is that the entire distribution becomes fully taxable for the current year and may be subject to a 10% early withdrawal penalty. Using a direct rollover, which transfers funds directly between institutions, completely avoids this risk and the associated deadlines.

When leaving an employer, many people are surprised to learn that their outstanding 401(k) loan balance is treated as a taxable distribution at the time of separation. They fail to roll over an equivalent amount of money from other sources within 60 days to cover this 'loan offset'. This results in the loan amount being subject to income tax and a 10% penalty if under age 59½.

The notice lists several payment types that are not eligible for rollover, such as Required Minimum Distributions (RMDs) and hardship distributions. Individuals may mistakenly attempt to include these amounts in a rollover, leading to excess contributions to their IRA, which can incur penalties. Before initiating a rollover, it's crucial to confirm with the plan administrator exactly which portion of the payment is eligible.

A beneficiary who is not the deceased participant's spouse may not understand their limited options and attempt a 60-day rollover or try to roll funds into their own existing IRA. The rules only permit a direct rollover to a specifically titled 'inherited IRA.' Failure to do this correctly can make the entire distribution immediately taxable and forfeit the ability to stretch distributions over their lifetime.

The notice lists several exceptions to the 10% penalty, such as the 'age 55 rule' for separation from service, but people often misapply them. For example, one might think the age 55 rule applies to IRA withdrawals (it doesn't) or not realize it only applies if they separate from service in the year they turn 55 or later. This misunderstanding leads to an unexpected 10% tax penalty on their distribution.

When rolling pre-tax plan funds into a Roth IRA, the entire amount rolled over (less any after-tax contributions) becomes taxable income for that year. Individuals often make this choice without planning for the significant, immediate tax liability it creates. This can lead to a large, unexpected tax bill and potential underpayment penalties if estimated taxes aren't adjusted accordingly.

A surviving spouse has the unique option to roll over funds into their own IRA or into an inherited IRA, each with different rules for RMDs and early withdrawal penalties. A younger surviving spouse might benefit from an inherited IRA to access funds penalty-free before 59½, while an older spouse might prefer treating it as their own to delay RMDs. Rushing this decision without understanding the long-term implications can lead to lost flexibility and unnecessary taxes.

The rules for rolling over after-tax contributions are complex, especially regarding how they are allocated in partial rollovers. An individual might incorrectly calculate the taxable portion of their distribution or fail to track the basis (the after-tax amount) in their new IRA, leading to paying taxes twice on the same money. When filling out the actual distribution forms, which may be non-fillable PDFs, AI-powered tools like Instafill.ai can convert them to be fillable and help ensure these complex figures are entered correctly.

This federal tax notice explicitly states that it does not cover state or local income tax rules, which can vary significantly and may include separate withholding requirements. Individuals often focus only on the 20% federal withholding and are surprised by an additional state tax bill on the distribution. Failing to research state-specific tax laws for retirement distributions can lead to an incomplete financial picture and unexpected tax liabilities.