IRS Rules for Reporting IRA and 401(k) Rollovers

You have created a self-directed IRA or Solo 401(k) plan and you rolled over funds from other retirement plans (e.g., IRA, 401(k), 457, 403(b)) into your new plan.  You are now happy and content that you have a self-directed plan, and are on your way to making investments into non-traditional assets (e.g., real estate).  You also know that as manager of your IRA LLC or Trustee of your Solo 401(k) plan, you must comply with all IRS and DOL Prohibited Transactions.

You think you are done going into this new tax year….but, are you?!  Please remember you must report the rollover received on your 1040 tax return.  In short, you will need to remember that the originating custodian who rolled over your funds will be sending a completed 1099-R to both you and the IRS.  In simple terms, this is informing the IRS that funds have been distributed from the plan…this doesn’t mean that they are taxable; however, the custodian must report whether the funds were a taxable distribution or a permissible and qualified rollover of these funds.  In addition, even though the IRS will receive this from the custodian, they need you to report this transaction as well.  Think of it as the right hand (you) is confirming what the left hand (custodian) did, and vice-versa.

IRS Rules for Reporting IRA and 401(k) Rollovers

In short, you will need to remember:

Distribution from an IRA — If the 1099-R shows a distribution from an IRA, you will need to report this on Form 1040, Lines 15a and 15b.

Distribution from a 401(k) — If the 1099-R shows a distribution from a qualified plan (401(k)), you will need to report this on Form 1040, Lines 16a and 16b.

Further, the IRS wants you to write “ROLLOVER” in the left margin of the 1040 so they are being notified that this was a rollover.  In addition, they want the tax payer to write a brief note just explaining what occurred.  Now, does this mean that even if you do everything correctly that the transaction still cannot be questioned?  Of course not.  But, as long as you have done everything correctly, you should always be able to adequately show that the rollover was executed in compliance with IRS code.

Custodian Mistakes?!

Finally, a word to the wise.  Many financial service companies make mistakes in processing the rollover paperwork.  In fact, many will tell you they do not have to issue a 1099-R as it is a direct custodian to custodian transfer.  Keep in mind that a transfer is a direct custodian to custodian transfer  IF the plan is titled in the exact same manner (e.g., John Doe Traditional IRA transferred to the John Doe Traditional IRA; John Doe 401(k) plan directly transferred to John Doe 401(k) plan at another company).  Always seek tax assistance from your tax professional, but keep in mind that a rollover should always trigger the 1099-R form, and you should take the steps necessary to secure this EVEN IF the originating company says it is not necessary.  In fact, I highly recommend that if a company advises in this manner, you need to ask them to confirm this in writing (email, written correspondence).  Usually when you make this request, they will send you to another department within the company and, in most cases, the next department may actually advise you that you are correct in your understanding of the rule.

Self-directed plans can be a wonder opportunity to invest in assets outside of Wall Street.  Make sure you get off on the right foot by reporting the rollover of funds into your new plan as the IRS dictates.