He Rolled His $400,000 401(k) Into an IRA and Deposited the Check. The $80,000 His Plan Held Back Became Income to the IRS and Medicare
One checkbox on a retirement distribution form sent $80,000 straight to the IRS, and the retiree who deposited the remaining check thought he had done everything right. Two years later, Medicare disagreed.
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A 65-year-old retires in the spring and calls his 401(k) plan to move $400,000 into a rollover IRA. The distribution form asks whether he prefers a direct rollover or a payment made to him. He selects payment to himself and requests that the plan mail him the check. Ten days later an envelope arrives from the plan for $320,000. He signs it over to his new IRA custodian, feels good about handling it himself, and closes the file.
That missing $80,000 was mandatory 20% federal withholding on eligible rollover distributions paid to the participant, required under IRC Code 3405(c). The plan sent that money to the IRS as a prepayment on his taxes. To keep the full $400,000 out of taxable income, he had 60 days to add $80,000 from other savings on top of the $320,000 check and deposit the combined amount into the IRA. He did not. The IRS now treats the missing $80,000 as a 2026 distribution.
Because he is 65, he escapes the 10% early-withdrawal penalty but not the ordinary income tax. Medicare’s two-year income lookback also applies.
Why the Check Arrived Short
An eligible rollover distribution paid directly to the participant triggers mandatory 20% withholding, and the IRS still treats the full pre-withholding amount as distributed. Depositing only the net check rolls over only the net. IRS Topic 413 and Publication 575 spell this out. Direct trustee-to-trustee rollovers, where the check is payable to the receiving IRA custodian for the benefit of the participant, avoid the withholding entirely. The important detail is the name on the payee line, not the mailing address.
This is the most common mistake at retirement. Nearly every worker rolls a 401(k) at some point. One wrong checkbox on a distribution form can cost tens of thousands in avoidable taxes and, two years later, a Medicare surcharge nobody flagged at the time.
Errors like this one rarely travel alone. We cataloged nine IRS rules that quietly drain six figures from retirement accounts, this rollover trap among them, in a free guide you can grab here.
How $80,000 Becomes a Medicare Bill in 2028
Medicare’s Income-Related Monthly Adjustment Amount (IRMAA) starts with Modified Adjusted Gross Income: AGI from Form 1040 line 11 plus tax-exempt interest from line 2a. Social Security uses a two-year lookback, so 2024 income drives 2026 premiums and 2026 income drives 2028 premiums. The failed rollover lands squarely on that 2026 return.
The 2028 brackets based on 2026 distributions have not been published yet, but the latest schedule shows the size of the cliff. The standard Part B premium in 2026 is $202.90 a month. Cross the first IRMAA threshold ($109,000 single, $218,000 joint MAGI from 2024) by a single dollar and Part B jumps to $284.10, an $81.20 monthly surcharge, with another $14.50 added to Part D. In the following bracket, the total Part B premium rises to $405.80, including a $202.90 monthly surcharge, while the Part D surcharge reaches $37.50. Atop the 2026 table, the Part B surcharge is $487.00 and the Part D surcharge is $91.00.
Fewer than 10% of Part B beneficiaries pay IRMAA, but an unexpected $80,000 distribution can pull someone who was previously below the threshold into its reach. Add it to taxable Social Security benefits, a pension, a spouse’s wages, and investment income, and the household can cross one or more brackets. If both spouses are on Medicare and file jointly, each receives a separate surcharge based on the same joint MAGI.
Double the Damage
The joint IRMAA thresholds are exactly twice the single ones. When one spouse dies, the survivor begins filing single the following year. The bracket that used to protect $218,000 of joint income now protects $109,000. Same portfolio, same Social Security deposit, same required distributions, larger Medicare bill. A one-time event like this rollover error, layered on top of a future filing-status change, is what silently pushes households into a tier they never modeled.
What to Do Before Day 61
If the check has arrived and 60 days have not passed, call the receiving IRA custodian and ask exactly how to deposit both the check and $80,000 from outside savings as a single rollover contribution. The withholding then returns through the tax return as a credit or refund. If 60 days have passed, the $80,000 is a taxable distribution, and the priority shifts to controlling every other item on the 2026 return that touches MAGI: Roth conversions, capital gains harvesting, discretionary IRA withdrawals, and muni bond interest that quietly counts anyway.
The rollover mistake itself does not ensure relief on Form SSA-44. His retirement may. Work stoppage is a recognized life-changing event, so if his income is lower when the 2028 notice arrives, he may be able to ask Social Security to use a newer estimate or tax return.
Before signing any future distribution form, confirm two things in writing: the box marked direct rollover is selected, and the payee line reads the receiving custodian for the benefit of the account owner. That is the entire fix, and it costs nothing but time.
Contact [email protected] for any questions or corrections.
Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
