Reporting 401K Rollover Into IRA

When you leave a job, a lot of changes come with it – including your retirement account. So, what happens to your 401(k) retirement plan after you transition out of a job? One option is to rollover a 401(k) to an individual retirement account (IRA). An IRA rollover (also known as IRA transfer) is a way to take your previous 401(k) retirement account with you, but there are tax impacts to be aware of. Keep reading to learn how to roll over your 401(k) and report the changes to the Internal Revenue Service (IRS).

What is a 401(k) rollover?

A 401(k) rollover is when you transfer the money from a previous employer qualified retirement plan (such as a 401(k) account) into a personal Individual Retirement Account (IRA) you set up on your own. The rollover IRA process involves two options for moving your retirement funds until you’re ready to use it in your golden years.

So, why roll over your 401(k) to an IRA? For starters, your previous employer may require it. Or, you may choose to so you have more control over your retirement savings and a wider range of investment options. Plus, if you’ve switched careers a few times, consolidating your 401(k)s into a single IRA account can help simplify financial management.

How to rollover a 401(k)

You can roll a 401(K) into an IRA in two ways: through a direct rollover or an indirect rollover. Let us clarify direct vs. indirect rollovers:

With a direct IRA rollover, the plan administrator will have the eligible rollover distribution paid directly to the trustee of the IRA. If done properly an early withdrawal penalty doesn’t apply.

With an indirect IRA rollover, the funds are paid to you and not the final account. There’s two big differences here.

1. The money you’ll receive will be the distribution amount minus tax withholdings. For example, if your distribution is $10,000 and 20% is withheld, you’d get a check for $8,000.
2. It’s your responsibility to get all of the money distributed (including the amount withheld) into the IRA within a 60-day period.

If you miss the 60-day window, you’ll likely pay a 10% early IRA distribution penalty.* So, using the same example as above, you must deposit all $10,000 into the IRA within 60 days or pay the taxes and penalties on the difference.

*Unless an exception applies.

How should you report the 401(k) to traditional IRA rollover?

The process of IRA rollover reporting hinges on the rollover type. Let’s break it down step-by-step based on each category:

For direct rollovers:

1. The 401(k) plan administrator will send you IRS Form 1099-R.
2. You should check that it’s correctly labeled as a direct rollover.
3. On the form, look for a few key items:

• Box 1 (Gross Distribution): This is the total amount distributed from your old retirement account.
• Box 2a (Taxable Amount): In the case of a direct rollover, this box should be left blank. If there’s an amount here, it could indicate that taxes were withheld from the distribution.
• Box 7 (Distribution Code): The code “G” signifies a direct rollover. This is the code you’re looking for.

4. Next, you’ll transfer this info onto your individual tax return. For most people, you’ll use IRS Form 1040. On the form:

• Line 5a (Pensions and annuities): Report the total distribution from Box 1 here.
• Line 5b (Taxable amount): Since you’ve executed a direct rollover, leave it blank.
• Line 5b: Write Rollover next to line 5b.

5. Dot your “i”s and cross your “t”s, the work doesn’t stop at federal taxes. Each state’s reporting (and taxation differs), so check with an H&R Block tax pro in your area for specific state guidance or rely on one of the easy-to-use H&R Block Online options.

For indirect rollovers:

For indirect rollovers, where you received a distribution from your 401(k), 20% in federal taxes might have been withheld from that check.

1. The 401(k) plan administrator will send you Form 1099-R.
2. Use the values reported on your 1099-R on your personal tax return via Form 1040.
3. You must roll over the check amount and the 20% withheld within 60 days for the distribution to be tax-free. This applies even though you didn’t receive the 20%. If you do this, you might get most of the withheld amount back in a refund when you file your taxes since it won’t be needed to pay the tax on the withdrawal.
4. Review Form 5498. It provides details about the rollover and confirms to the IRS that the distribution was successfully rolled over.

If you forgot to report the 401(k) rollover, can you file an amended return?

The 401(k) plan administrator should have sent a Form 1099-R reporting your rollover, if you didn’t receive it, or accidentally forgot to report the IRA when you initially filed your tax return, you can report your 401(k) rollover on a Form 1040X: Amended Return. Once you locate your 1099 form (or request and receive a new one), use it to complete your taxes and affix it to your amended return – then file it away with the IRS!

Where to go for more tax help

Tackling taxes alone can be confusing, especially when dealing with direct or indirect rollovers.

For more guidance with IRA rollover taxes, lean on the expertise at Block.

Whether you choose to file with a tax pro or file with H&R Block Online, you can rest assured that we’ll get you the biggest refund possible.