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Reporting 401(k) and IRA rollovers

TAX TIP No. 62

When you changed jobs, your 401(k) went with you. You transferred it directly from your old workplace to your new company's plan, never touching the cash yourself.

That was a wise move. Not only did you maintain your retirement fund's consistent earnings, you also helped minimize tax hassles.

So what's with that Form 1099-R you got, the one with the notation that a copy has gone to the Internal Revenue Service? You thought you followed all the rules to avoid any taxes on your retirement plan transfer.

Don't panic, you did. But the IRS still wants to keep track of any so-called trustee-to-trustee transfers that you make with tax-deferred retirement accounts. The key here is reporting the amount moved and the amount that's taxable. With direct rollovers, these are two dramatically different figures.

The 1099-R you received will help you differentiate -- and properly report -- these amounts.

What the 1099-R tells you

Box 1 of the form shows the total amount of your retirement fund that was distributed. The more important amount to you right now is in box 2a, the taxable amount. For direct rollovers from one qualified plan to another, that amount is generally zero.

In this tax tip:
  • What the 1099-R tells you.
  • What you tell the IRS.
  • Don't touch the money.
Also check box 7, the distribution code. A letter or number should be here, explaining to the IRS exactly why your retirement money was taken out and just what was done with it. Direct rollovers to another qualified plan are coded with the letter "G." This includes transfers to another company's 401(k) plan, a tax-sheltered 403(b) annuity, a government 457(b) plan or an IRA.

The code lets the IRS know that the money was never in your hands, an important point when it comes to taxes on transferred retirement funds. If you had taken the money out yourself, taxes would have been withheld.

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What you tell the IRS

Now that you're sure that your retirement plan transfer is reported correctly on your 1099, you must tell the IRS the same thing on your tax return. If you got a retirement distribution, you can't file a Form 1040EZ. You must file either a 1040A or 1040 return.

Your full company retirement plan distribution goes on line 12a if you file Form 1040A, on line 16a if you use the long Form 1040. The taxable amount -- zero for direct rollovers since you are not taking out the money -- then goes on line 12b or line 16b. Be sure to write "rollover" next to the amount.

The same process is used if you move IRA accounts, say to consolidate multiple accounts or get a better return on your retirement investment. For reporting purposes on your tax return, an IRA includes a traditional retirement account; a Roth IRA; a simplified employee pension, or SEP, IRA; or a savings incentive match plan for employees, or SIMPLE, account.

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