Context- A member presented us a direct rollover check for $40,000 and asked if she could keep $10,000 and roll over only $30,000 into the IRA. 

In situations where IRA owners change their minds regarding the rollover of retirement plan assets, we have two options. These options are based on the strict IRS reporting and withholding requirements that accompany the movement of retirement plan assets. 

The first option is to send the check back to the employer and state that the IRA owner has changed her mind about completing a direct rollover. The IRA owner must contact the employer to redirect the distribution. The employer may issue one check for the IRA owner and another check for the direct rollover. Another option is to deposit the rollover check into the Traditional IRA, and then the IRA owner may take a distribution from the Traditional IRA, thereby avoiding 20% mandatory withholding that is required for an eligible rollover distribution from a retirement plan. But the distribution from the Traditional IRA is taxable and the IRA owner is subject to the 10% early distribution penalty tax unless she has a penalty tax exception.