Automatic disbursement of small retirement account under $1,000 - can I avoid the 10% penalty on a check I never received?

Thanks for the info. I had no idea about the 60-day rollover option! Do I need to roll over the entire original amount including what they withheld for taxes, or just the amount I'll receive in the direct deposit? And can I roll it into my current 401k at my new job, or would I need to open an IRA?

You'd need to roll over the full distribution amount including taxes withheld to completely avoid penalties. So you'd need to deposit the $248 you receive plus come up with the additional $62 that was withheld for taxes out of pocket. Then you can claim the $62 withholding as a credit on your tax return. You can roll it into either your current employer's 401k if they accept rollovers or into an IRA. An IRA is often easier and faster to set up if you don't already have one. Most online brokerages let you open one in minutes.

How does taxr.ai handle the withholding part? My situation is similar but the company withheld 20% and I'm not sure I can come up with the extra money to roll over the full amount.

Sounds interesting but kinda skeptical. Does it actually help with the rollover process itself or just tell you what to do? And how does it know about these exception provisions - is it updated with current tax laws?

The tool specifically addresses withholding issues and shows you how to handle it on your tax return. It explains that you'll need to deposit both the amount you received plus the amount withheld to complete a full rollover, but if you can't add the withheld portion, it calculates the partial rollover tax implications too. Regarding your second question, it doesn't execute the rollover for you but provides step-by-step instructions. It's regularly updated with current tax laws and IRS guidance - that's actually what impressed me most. It referenced some recent IRS revenue procedures I hadn't found anywhere else that applied to my situation.

How does this actually work though? I don't get it - do they somehow have a secret line to the IRS or something? Seems kinda sketchy to give my info to some random service.

Yeah right. Nothing gets you through to the IRS quickly. I've been trying for WEEKS to talk to someone about my missing refund. If this actually worked everyone would be using it.

They don't have a secret line - they use technology to handle the waiting and navigating the phone tree. They just call the normal IRS number but have systems to monitor the hold music and menu options. When a human finally answers, their system detects the change and calls you to connect. You don't need to provide sensitive information - just your phone number and which IRS department you need. Regarding your skepticism, I understand completely. I felt the same way until I tried it. The trick isn't that they're getting priority treatment - they're just handling the awful waiting process for you so you don't have to sit there listening to the hold music for hours. I was connected to an agent in about 12 minutes when I had previously spent over 2 hours trying on my own.

What kind of documentation should I be keeping? I have the 1099-R they sent and I'll get a confirmation when the direct deposit hits my account. Should I be asking Vanguard for anything specific like a letter explaining the automatic distribution?

You should definitely get Vanguard to provide a letter stating their policy on automatic distributions for accounts under $1,000 and confirming the original check was never cashed. Also keep all documentation of when you received the direct deposit as that establishes your 60-day rollover window start date. Keep records of the date you establish and fund the new IRA or 401k rollover, including confirmation statements. Make sure the receiving institution codes it properly as a rollover contribution. Take screenshots of everything and save emails.

Code "1" on a 1099-R generally indicates an early distribution with no known exception, which means the custodian (Vanguard in this case) is basically telling the IRS "this person took money out early and we don't know of any exception that would exempt them from the penalty." Code "7" indicates a normal distribution, which wouldn't trigger the 10% penalty automatically. The different code does make a significant difference in how the IRS initially processes the form. If you complete a proper rollover, you'll need to report it correctly on your tax return to override what the 1099-R is indicating. Most tax software has specific sections for handling rollovers that will guide you through this.