Rollovers Into a Self-Directed 401(k) — Reporting Reminders

It really doesn’t matter whether a rollover is being made into a self-directed 401(k) vs. your traditional 401(k)…a rollover is  a rollover as it pertains to rolling over assets into the 401(k) and correctly reporting the rollover to the IRS.

I have done past posts railing on some financial institutions who, in my humble opinion, do not correctly report the rollovers through a properly-executed 1099-R.  In short, many originating custodians (the custodian rolling the assets over to the new custodian) consider the transaction to be a “custodian to custodian transfer” and, as such, do not issue a 1099-R to report the rollover.  If I have seen it once, I’ve seen it 10 times.  I don’t believe that the IRS in any way, shape or form provides such leeway in a custodian not reporting a “rollover”.  (Please note that a “transfer” is different in that it is “like to like” and, if executed correctly, does not need to meet the more stringent “rollover” requirements).

So, what is the purpose on the 1099-R..in simple terms.  When assets are leaving the plan and being rolled over to the new plan, the originating custodian should be providing a 1099-R to report the rollover.  You receive a copy of the 1099-R as does the IRS.  What it simply is telling you is that the rollover has occurred between the two institutions and that, if executed correctly (assuming you did not want a taxable distribution from the plan), the assets were rolled over into the new plan directly with no taxable implications to you.

But, you noticed that the IRS received a copy of the 1099-R as well.  Should this concern you?

No.  Think of government classes you took when you were younger.  You may remember the term, “checks and balances”…balancing the different roles and responsibilities of the branches of our Federal government.  Think of the rollover in the same manner.  It is providing a form of checks and balances.  It shows you what was done (hopefully correctly) and shows that there is no taxable event.  From an IRS perspective, it is very important in that it shows the IRS the transaction was executed between institutions and you never received or touched the funds (assets) in any manner.  Folks, this is soooo important.  I do not know why anyone would even want to mess with the concept of ever receiving funds from a plan unless it is an absolute necessity.  Morale of the story….stay away from ever touching the funds!

So, you are now done with your rollover reporting requirements……right?!

No, you are not…but, don’t lose sleep, the final step is not a problem or cumbersome….

Once the rollover occurs between the originating and receiving plans, and a 1099-R has been prepared, the taxpayer is required to report the rollover on their 1040 tax form (for simplicities sake in this post, we will just reference the 1040 vs. the 1040-A).  Again, just remember “checks and balances.”  As the taxpayer, it is also your responsibility to account for this rollover on your individual taxes.

Rolling Over an IRA

1)  Report the rollover transaction on Line 15A

2)  Report, if correct, that there are no taxable distributions taken from the rollover on Line 15B

3)  Write “Rollover” in the left margin of the return

4)  Attach a brief, written statement to submit with your return describing what you did.

Rolling Over a 401(k)

1)  Report the rollover transaction on Line 16A

2)  Report, if correct, that there are no taxable distributions taken from the rollover on Line 16B

3)  Same as above

4)  Same as above

Remember, it is important to know the rollover reporting requirements.  At the end of the day, it is still incumbent upon you to make sure things are done correctly.  Be educated and involved…and, make sure the originating custodian fulfills their responsibility in correctly reporting the transaction through the 1099-R.

As always, the information provided is intended to be educational and informative in nature and is not intended, nor should be interpreted as, any form of tax, legal, financial or investment advice.  You must always consult with your respective professional in all such matters.