There is NO way to get out of this tax consequence! What a horrible mistake. You now owe taxes on ALL of this money — plus a 10% penalty if you are under age 59-1/2.. And you lose the future tax-deferred growth on that money!
Here is the rule:
You owe tax on a 401(k) or IRA distribution for the tax year in which the money was paid out, even if you don’t cash the check until the following year. Deferring income is a traditional tax-saving strategy, but a recent IRS ruling clarifies that not cashing a retirement plan distribution check doesn’t count.