8

The situation is that a friend was terminally ill and was struggling financially and so took a hardship withdrawal. His health took a turn for the worse and died before he received the check.

Now his wife told the bank he died and requested the withdrawal be reversed. Initially the bank said they would put the funds back into the account, but now (after 2 months) they are refusing, saying they can't because they already sent the withholding taxes to the IRS.

The bank has also stated they have never encountered this and are unsure how to proceed.

Can and how does this withdrawal get reversed, since the check was never cashed, and cannot be cashed since it is in his name only?

Any information or guidance regarding this unique situation would be appreciated.

  • Sorry for your loss. Did the deceased have a will, and did it appoint an administrator to settle the estate (an executor)? – Chris W. Rea Apr 25 '17 at 13:08
  • Thank you, yes there is a will but nothing has been done at this point. His wife is gathering documents for the attorney who is handling this and hopefully will forward to him this week. She has also now employed the services of an investment advisor who is going to help her with this 401k situation so I will post the outcome. – Mary Apr 26 '17 at 12:20
  • I strongly suggest that if the 'advisor' uses the word 'annuity', your friend end the discussion and the relationship immediately. – JoeTaxpayer Apr 28 '17 at 10:18
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First, if the bank or admin for the 401(k) said it's too late to reverse, I'd take them at their word.

As far as the check goes, it's not uncommon to have to deal with the last checks coming to a deceased person. Without any will, the wife is presumed to be the next of kin, and she should be able to cash the check by showing the bank the husband's death certificate. Unfortunately, tax and 10% penalty are still due on this money unless she can get a waiver from the IRS.

Edit in reply to new comment - The check could not be cashed and was reissued. Therefore, in my opinion, the 60 day clock didn't start until the money was actually available (the date the new check was cut). The gray area is how the tax withheld will be treated. The deposit of the new check into an IRA, whether spousal or beneficiary still doesn't take the 20% withheld into account. The widow also needs to decide whether to take the funds into a spousal IRA or a beneficiary IRA. They are treated differently.

In the end, I think the IRS will be lenient as they tend to back off when such unusual situations are presented.

  • 2
    Initially she was told the withdrawal would be reversed but when she was coming up on the 60 day rollover window and hadn't heard from them, she called them back and was told they were unsure how to proceed and were looking into it. Now she's been told the check is void and will be reissued once she forwards the death certificate/paperwork but she no longer wants/needs the money. If she is issued a new check would she be eligible to rollover the money to her 401k (it has been more than 60 days since the original check was processed). – Mary Apr 25 '17 at 11:05

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